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Wednesday, August 15, 2012

Former Chancellor Gerhard Schröder raises Greek spirits

Former Chancellor Gerhard Schröder is vacationing in Greece. Perhaps because Greek islands are beautiful; perhaps because the Greek weather is beautiful; perhaps because he can have a better vacation there than in most other places; or, perhaps - as he suggests - to show loyalty to the Greek people. Let's give him the benefit of the doubt and say it is the latter.

In an interview, he said the following sentence: "Greeks are hard working people who support their families with their hard work. They cannot be equated with all those mistakes which have undoubtedly been made over the years".

Uff, one apparently has to become an Elder Statesman to become able to coin such momentous phrases!

Of course he is right! The whole point is that a very large portion of the Greek population is now getting the very short end of the stick without deserving that at all! Just take the issue of tax cheating. When over half of the Greeks in some form of a working activity are taxed at the source for their income, you already have over one half of the Greeks in some form of a working activity which cannot cheat on incomes taxes.

Of course the Germans know that the majority of Greeks are hard workers, decent and honest people who strive to provide a better life for their families, particularly for their children. I mean, Greek guest-workers have demonstrated that in Germany during a couple of decades and Udo Jürgens wrote his ode to the Greek guest-workers which became most popular in Germany.

To say what Gerhard Schröder said in the interview is the easy part, and it is easy to agree with everything he said. The hard part is to figure out solutions to this problem.

Regarding solutions: Schröder, the man who colluded with his French buddy Mitterand to allow Greece's Euro-entry even though they knew, as they later admitted, that Greece was not qualified ("after all, they are the cradle of Europe and they are so small that they can't cause that much trouble"); Schröder, the man who is responsible - again in collusion with his French buddies - for the undermining of the Maastricht Treaty; Schröder, the man who is now so much involved with Russian leadership/oligarchs that he could easily start an "Invest in Greece"-campaign in Russia --- well, that gigantic symbol of a statesman is rather short on solutions.

An American boss once said to me: "I don't pay you to explain to me what's wrong and why it is wrong. I pay you to come up with proposals as to how we can make it right!"

12 comments:

  1. Mr. Kastner, all due respect, I don't understand why you cling to some notion that Greece was not qualified for the Euro.

    Truly, was anyone qualified for the Euro?

    The fact that the entire European South is burning should have put such notions to rest.

    And truly, if the European South leaves, then won't imbalances occur between the countries of the European North? And should a banking crisis occur, which (due to the inertia of the ECB) transfers to the real economy, wouldn't the governments that find themselves at the wrong side of the surplus/ deficit conundrum be in an impossible situation? That is to grow via exports in a market where everybody reduces spending due to some idiotic criteria (Maastricht) which are meaningless in the time of free-floating fiat currencies?

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    1. I would never base my notion on the fact that Greece may, at the time of entry, have misstated its deficit by something like 0,10% or so. At the time, had I paid attention to it, I am sure I would have considered Greece as qualified.

      With the benefit of hindsight it is easy to come to a different conclusion.

      All of a sudden one remembers that Greece's economy, as Prof. Varoufakis said in a 1993-interview, had been in terminal decline since the 1970s, and a terminally declining economy was certainly not fit for the Euro.

      All of a sudden one understands that if a country enters a curreny union and seemingly unlimited loans are thrown at it, the risk is very high that this money will be spent unwisely (on consumption, that is).

      All of a sudden one understands that Greek labor relations are different from those in Germany and that, particularly when cheap money is thrown at the country, chances are that Greek salaries/wages will raise much faster than those in Germany (particularly when Germany freezes them).

      All of a sudden one understands that Greek public administration is archaic and that a country cannot be run properly without a functioning public administration.

      Etc. etc.

      If Greece should have made it with the Euro, I guess Greece should have had from the beginning of its EZ-membership a EU Task Force doing what the EU Task Force is doing now - attemting to get public administration into shape (but something like that takes years!).

      Greece should have had, from the beginning of its EZ-membership, something like a supervising Eurostat which makes sure that economic reforms are made and measures are taken that the cheap money thrown at the country is not spent unwisely.

      Etc. etc.

      Theoretically, I think Greece could still make it with the Euro but for that, all these things which should have been done over the last decade or so now need to be accomplished in a hurry.

      I understand the Chinese just started their first car manufacturing operation in Europe. Where? In Bulgaria. Why not in Greece? That is the right question. I understand that, since the beginning of the crisis, 3.800 Greek businesses emigrated to Bulgaria and FYROM. Why? That's the right question.

      Ten years ago, anyone who dared to talk about beginning the EZ as a "currency union with two different speeds" would nearly have been crucified for being so anti-European. Today, we know that this would have been smart.

      In the US, the major balancing instrument when regions develop different levels of competitiveness and living standards is the migration of Americans from one end of their holy land to the other. They are all Americans and they all speak English.

      That balancing instrument is not available in the EZ. Correction: technically it is available but it is certainly not a fitting instrument in a Continent of different nations, different cultures, different languages and different loyalties to one's home country.

      Imbalances will always occur. Individual countries have domestic transfer unions to make sure that, within them, those imbalances are evened out. Among countries with their own currencies, it is the exchange rate which assures balancing over time.

      Would there be imbalances within the North? Sure there would be but they can be balanced out so much more easily when economies work on similar principles, when the business cultures are similar, when the economic capability is similar.

      Austria has been in an informal currency union with Germany since the 1980s (2 decades before the Euro). The capability of the German economy is greater than that of the Austrian economy (20 years ago it was even MUCH greater). So, the Austrian state pays higher interest rates on its debt and the living standard of Austrians is lower than that of Germans (overall, that is). As long as Austrians can live with that, there will never be a problem. Should Austria insists on paying the same interest rate as Germany and should Austrians demand the same living standards as Germans, things would get tough and real imbalances would occur.

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    2. Mr. Kastner, I appreciate your emphasis on Greece but, really, let's not delude ourselves, this is not the issue here.

      The issue is how to deal with a situation when the private sector scales down it's borrowing.

      Let's not forget, money is not a commodity. We don't dig money out of the ground. In order for money to exist, somebody has to borrow it.

      And let's not forget, the economy is all about demand. Business hire or produce when there is sufficient demand for their products/ services.

      Now, the Eurozone has adopted some unfortunate criteria which stop the governments from fighting a depression that is caused by this retrenching of the private sector. So now the European South (not just Greece) is burning because of this. But at some point this unfortunate situation is going to reach the shores of the North, what with the North's tendency to suppress aggregate demand so that it grows at the expense of others.

      Then we will see what happens.

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    3. I beg your pardon: for Greece, the issue should be Greece and nothing else!

      Greece is not an export nation which feels a slump because international demand is declining (actually, Greece is INCREASING its exports quite substantially these days!).

      Greece is an import nation. Imports mean that one satiesfies domestic demand with products which are produced elsewhere and where the respective jobs and their income taxes are elsewhere.

      I believe Greece imports close to 40% of its foodstuffs. Why does a country with an agricultural tradition like Greece not substitute some of those imports with domestic production? That would quickly generate new economic activity. There is not enough domestic demand? Well, look at the demand for imports!

      The private sector scales down its borrowing? Fine, let the private sector use equity instead. Greece's banking sector had well over 70 BEUR of financial equity withdrawn from it in the last 2 years. Well, get some of it back!

      All the Greek government would need to do is to really hurt the import lobby, which - I understand - is extremely strong. All the Greek government would have to do is to figure out ways to get foreign investment into new production to satisfy domestic demand via import substition. Easy? No, extremely difficult. But the only party which can do that is Greece!

      I agree with you that the crisis will eventually reach the North. But even if and when it does, it won't change anything in Greece. The Greek economy will still have the same problems (insufficient domestic value generation) as before.

      Perhaps Greece should take a lesson from Cuba, certainly a country whose economy is in much worse state than that of Greece's. But even the communist Cubans came up with ideas about improving their own lot when Soviet funding died out. What did they do? They attracted foreign investment and, lately, they are allowing some private sector initiatives.

      Greece can't do in a bigger way what Cuba did in a small way? Come on! Greece can't take a lesson or two from countries like FYROM or Bulgaria?

      http://www.ekathimerini.com/4dcgi/_w_articles_wsite6_1_14/03/2012_432976

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    4. @kleingut wrote I would never base my notion on the fact that Greece may, at the time of entry, have misstated its deficit by something like 0,10% or so. At the time, had I paid attention to it, I am sure I would have considered Greece as qualified.

      With the benefit of hindsight it is easy to come to a different conclusion.


      These folks did not need hindsight, 155 German Economics Professors Call For delay of EMU - February 1998

      I doubt Kohl would have done anything different with his old pal Mitterand regarding the EMU. Kohl, Schauelble, Mitterand & Delors invented it, all Schröder did was to inherit and get on with it.

      I still can't find solid evidence that Greece has ever been self sufficient in food & agricultural goods, let alone a net exporter. 2,500 years ago it was importing grain from its colonies in Anatolia and Egypt. This so-called 'agricultural tradition' I see mentioned here & elsewhere is probably yet another Greek Myth borne of wishful thinking.

      CK

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    5. Mr. Kastner, we're going around in circles. We need to break the circle and get out.

      Nobody disputes the horrible inefficiency of the Greek economy (and society I may add).

      So yes, there need to be reforms, and perhaps even non-conventional measures (that violate EU law I may add) like taxes on imports, and maybe one day Greece will be able to generate more value.

      But there are bigger issues at stake, as shown by the fact that half of Europe is in recession/ depression, and you refuse to acknowledge them. And the bigger issue is that (lest we return to a barter economy) the economy is driven by demand, and demand is driven by money. And the only reason we have money in our pockets is because someone else is spending more than his income. So in a time when the economy badly needs more demand, the European powers-that-be do their best to choke it because they've gotten used to the idea that it must be someone else that spends more than his income and not they. That is they've gotten used to the idea that they should grow at the expense of others.

      But there are no others this time.

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    6. Yes, we are indeed going a bit in circles. Mind you, I agree with you that, at the end of the day, growth is the only way out of debt problems. The only thing is that growth must be sustainable. If it is not, it only postpones the moment of truth.

      If you convince me that Greece’s running a budget deficit of 10% (a budget deficit is nothing other than an economic stimulus program) will lead to sustained growth, I would be all for it.

      I definitely do not object to new funding for the Greek economy (without it, Greece would become a basket case). I am just very reluctant to think that funding via the government would lead to sustained growth. To make a provocative case: if the new funding goes into the buying of imported consumption goods, it only postpones the moment of truth.

      Actually, the math is quite simple. GDP is composed of public and private sector activities. If some austerity program cuts back public sector activities and if that is not compensated for by new private sector activities, you get a slump. We all know that the inventors of austerity forgot to simultaneously do something about new private sector activities. That was a huge error! All I am saying is that Greece could have done a bit on that part, too (and still can).

      I just believe that the best way to assure that sustained growth is achieved through new funding is when the private sector (particularly the foreign private sector in the case of Greece) does the funding directly in the Greek private sector. That can only happen if and when the right policies/incentives are offered to private sector investors.

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    7. I do not have such constraints when it comes to private spending versus public spending.

      If this crisis taught us anything, it's that private spending can be just as harmful, if not more, than public spending.

      Furthermore it seems somewhat ironic to have such a bias in favour of private spending, when the thing we call "the free market" is not really free at all, but rather quite heavily regulated, even if most people are unaware of it (the common agricultural policy comes to mind).

      However your point is a fair one. It seems only just to make sure that in the absence of an exchange rate, any extra money should stay within the Greek borders, even if such a thing goes against the spirit of what a monetary union really is.

      Sadly, the only solutions that I can come up with are the following:

      a) targeted investment that will benefit the Greek account.

      I reckon that the biggest problem with this solution is not so much that it's as central-planning as they come, but rather that the North will never accept it due to it's reluctance to rebalance. As we speak, the private sector in the European North is increasing it's spending, taking advantage of the low interest rates, but the Northern governments are choking this extra demand by imposing increased taxation.

      b) exit the monetary union. That way any bad spending (public or private) will be reflected on the exchange rate.

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    8. I guess we agree that a Grexit would quickly solve many of the problems we are talking about (at huge cost for Greece!) but as a matter of principle I do not want to talk too much about the Grexit-alternative (yet).

      Let me explain why "incentives for foreign investment" have nothing to do with a planned economy.

      Suppose you are the principal of a mid-market German family-owned company which already has operating companies in several countries. At least once a year you have to sit down and make your capital investment budget. Part of that budget will, of course, be spent in Germany but another large part will be spent outside it. For several reasons.

      One would be that the company considers market x as an interesting market and feels that the best way to conquer it would be through a local production. Greece is probably too small a market for that purpose.

      However, EVERY German company will always compare domestic manufacturing economics with the economics offered elsewhere. They have a list of the places which currently offer the best economic framework for foreign investment. They go down the list and analyze each country.

      A country which is on the list has no guarantee to get the investment but a country which is not on the list will certainly not get it. If Greece created an economic framework (I suggest in Special Economic Zones) which would make those SEZ the star on the list, something positive would happen. Mind you, there IS a budget for capital investments outside Germany. The question is only where it goes to. Everyone is competing for that foreign investment.

      Remember that this happened before. In the 1970s, many German companies opted for Greece, primarily due to low labor costs. If Greece wants to compete exclusively on the basis of low labor costs, I would consider it as a poor idea because China & Co. will always be cheaper.

      Greece has to compete on the basis of something else (attractive labor costs included, of course). That "something else" is the trick to the whole thing. Greece has to give the foreign investors a reason so that they shift their foreign investments to Greece and not to some other place.

      You may wish to look up the World Bank's "Doing Business 2012" report. It ranks countries on the basis of their attractiveness for doing business. Greece ranks No. 100, by far the lowest of all EU countries. Incidentally, FYROM ranks at No. 22.

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    9. Here are details about the "Doint Business 2012" report.

      http://klauskastner.blogspot.co.at/2012/06/ease-of-doing-business-in-eu.html

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    10. And here is the attractiveness of doing business expanded with the corruption index.

      http://klauskastner.blogspot.co.at/2012/06/doing-business-with-corruption.html

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  2. "Gas Gerd" Schröders first finance minister Lafontaine tried to regulate financial markets. He surrendered.

    Dax was raising seven percent after he resigned.

    http://www.welt.de/print-welt/article568113/Lafontaine-macht-Spekulanten-reich.html

    A really big disappointment that the red-green coalition 1998-2005 not only did nothing to regulate financial markets - they made the situation even worse.

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