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Tuesday, February 12, 2013

Consequences of Euro --- "Too many houses in Spain; too many civil servants in France; too many factories in Germany"?

The author of this article, Charles Gave of GKResearch, claims that he projected already back in 2000 that the Euro would lead to 'too many houses in Spain, too many civil servants in France and too many factories in Germany'.

The article further states that 'the euro project has led to massive divergences, with the strong getting stronger, and the weak getting weaker. For these trends to change, we would need radical change. We are not talking about retirement age being nudged up a year in one country, or a rules for firing people liberalized an iota in another. We would need to see bloated states firing 20% to 40% of civil servants, and the government spending share of GDP to plunge; the cost of labor to fall by at least –20% relative to the cost in Germany; the return on invested capital in Europe’s South to move above the ROIC not just in Germany but also in Eastern Europe. There is zero chance of these types of reforms taking place'.

Could it be that the future will be as bleak as this article suggests? Well, maybe yes, maybe no. Economists can debate this endlessly.

As a practitioner, I would argue that miracles don't have to be achieved overnight. What matters is that the trend is changed. If the Euro has caused a trend which led to the de-industrialization of Greece, a country which was never all that much industrialized, then that trend must be reversed urgently. I am not saying that Greece should become the home of chemical or steel corporations. Instead, Greece should become the home of many, many more small and medium size production companies than there presently are.

Is there no more than a zero chance of this happening? I don't think so. The flow of investments into productive enterprises is by far not only a function of cheap labor costs. Instead, investments flow because the whole 'package' is right. A proper package is the greatest incentive for the flow of investments.

Only when the day comes that I see discussions within the Eurozone focusing on the flow of investments within the Eurozone (possibly at the expense of investments outside the Eurozone) will I believe that a trend reversal has a fair fighting chance. So far, I don't see that.

Almost 3 years ago, the CEO of the Allianz Group said in an intereview: "We (Germany) will have to re-direct our foreign investments from the East and Far East to the South of the Eurozone". That would indeed be the answer to many problems. Has anything been accomplished along those lines?


  1. Spain's SEAT wouldn't exist without Germany's VW, Romania's Dacia wouldn't exist without France's Renault. And without VW's success in China and Renaults partnership with Nissan then maybe they would have never made or kept those investments going.

    And without Germany's Beiersdorf I wouldn't be able to buy Made in Spain Elastopast dressings in Australia

    And then there's all the Eastern Europeans who work in Germany, Austria, etc and take/send their earnings back to spend in Eastern European shops.

    The glass is always half full.

    To Vima (greek) reports on a meeting between the Minister of Development and Dimitris Tsigos the President of the Hellenic Start-up Association - Facilities promised to Young Entrepreneurs - in which the minister appears to have said something like:-

    ... the key message sent to me today by these young people, is that the state should get out of the way and allow the Greeks turn to entrepreneurship in order to make their dreams come true and create their own futures. And this is the fundamental obligation of government. And it is an absolute priority for us to move in this direction, adding that this will the message he will deliver to Prime Minister Antonis Samaras.

    If Google and I are correct in our translation, then that ought to bring a tear to your eye and a cheer in your heart.

    That item mentions the NSRF, which I discover is the National Strategic Reference Framework I think its the Greek agency responsible for 'managing' the funds Greece gets from the EU Commission, EIB etc. Maybe I can now figure out why Greece didn't spend the billions in Structural Funds etc that the EU made available in the years leading up to 'the crisis'.

    Its a pity that To Vima isn't published in English. Is it widely read by Greeks? I hope it is because its a lot better than the English edition of EKathi. Perhaps I should also try reading the Greek version of EKathi in translation.

    Oh - surely Charles Gave is just regurgitating what David Rhodes and Daniel Stelter wrote in their 2011 BCG trilogy - The Years Ahead, Stop Kicking the Can Down the Road and Back to Mesoputamia. If anyone's interested in reading those reports then they're in the public domain, a search of the titles with 'Boston' will find them.


  2. You are an old-fashioned man, Mr Kastner.

    But the world has changed. Money has changed. Refusing to acknowledge that won't make modern money any different.

    Thankfully, Martin Wolf's recent comment on the Financial Times - beautifully - presents the case why current policy is foolish and won't return us to growth anytime soon.

    You are a liberal, so I can understand why you wouldn't want to admit this, but the solution to the current debacle is increased public spending.

    The answer to wasteful public spending (during a time when private spending is defunct) isn't pretending private spending isn't defunct. The answer is making sure public spending is useful.

    1. Allow me to say that you frequently tend to put things into my mouth which I am not saying. To make this a bit more specific, let's focus on Greece instead of the world at large.

      I don't have the figures at hand but memory tells me that about 1/2 of Greece's austerity so far came via a reduction in public spending on investments. Do I think that was smart? No, I don't. Do you?

      "The answer is making sure public spending is useful", you say. I couldn't agree with you more. When spending is useful, it doesn't matter all that much whether it comes from the private or the public sector. If spending is useful, it means that there is a return.

      It just so happens that Greece does not have any track record of useful public spending. As everyone seems to know by now, the literal explosion of public spending after 2006 went straight into consumption (much of it for consumption of imports) and other things which really don't generate a return.

      Yes, I agree that, in times of trouble, it is better to pay the unemployed a wage to dig a hole and then to fill it up again, under one condition: that he spends his income in the economy at issue and not on imports from other economies. Otherwise, tax payers financing his wages are really stimulating other economies.

      Germany responded to the 2008/09 crisis by implementing a 'srap bonus for cars'. In the end, it was a success. At the beginning, it looked like Germans might use that bonus to buy cheap cars from Asia. Had they done that, German tax payers would have supported Asian economies.

      The former Chancellor Helmut Schmidt, totally unsuspicious of any Nazi-sympathies, once talked about German economic policies during the 1930s. The elimination of record unemployment within a short period of time was the result of huge deficit spending. It was deficit spending into public works like Autobahns. After 1936 or so, it became deficit spending for arms. There was no explosion of consumption during that time, i. e. Germans forgave short-term consumption in favor of real asset investments and the build-up of a war machinery. There were ingenious ways of financing all of that out of thin air (Central Bank, but not only).

      Now suppose Germany had not started a war in 1939 but, instead, sold all of the arms which it had produced in world markets (just a theoretical argument). That probably would have led to a much stronger Germany in 1945 than the war did.

      If the Greek state invests, for example, into a Formular 1 racing track, there would be short-term recovery in the area. Longer term, it wouldn't produce any benefits. On the contrary, it would require further public cash to fund the losses.

      If the Greek state invested in the same thing as Panos Germanos of Sunlight is doing, it would make as much sense for the Greek state as it does for Mr. Germanos.

      To close, the question is less who does the spending. Instead, it is what is the is money spent on. Yes, I am biased in thinking that the Greek state would not spend the money as well as the private sector but if I am wrong on that, I apologize.

    2. This NYT ediorial, for example, is something which I could totally agree with.

  3. "It just so happens that Greece does not have any track record of useful public spending."


    So let the European Union supervise - or do directly - the spending.

    But they don't, and won't.


    "Otherwise, tax payers financing his wages are really stimulating other economies."


    First of all, it'd be nice if the spending stimulated only the Greek economy, and I'm sure there are ways of solving this problem.

    However, I don't see why it's such a huge problem if part of the spending stimulated the other economies of the Eurozone.

    We do share the same currency after all, do we not?

    1. "So let the European Union supervise - or do directly - the spending.

      But they don't, and won't.

      They will and they do.

      But only after you've had a civil war, and Uncle Sam's put an end to it, and NATO has occupied your territory. Boz-Herz and Kosovo being the examples. Neither of which is an island of prosperity. If you think Greece has a poor record of 'useful public spending' take look at the record of the EU running either or both of them.

      But, overall the EU is probably no better or worse than the UN or US State+Defense are at 'useful public spending' of other peoples money in some other peoples country. And they are all worse than many national governments are at spending their own money in their own country, including Greece.

      State funded, owned and operated enterprises are almost invariably monopolies, which more often than not leads to high prices, poor outputs, cost bloat and stagnation as opposed to low prices, quality outputs, frugal costs and innovation.

      Where the state has created competing institutions, they've sometimes been very creative - like Ginnie & Fannie Mae and cousin Freddie Mac :snark: Of course some things are 'natural' monopolies, e.g. you wouldn't want vehicle manufacturer specific roads between the same locations... or even different locations :)

      More evidence that the Greek Government knows what the problems are and how to fix them. This ones from the NSRF (the agency I stumbled into yesterday).
      NATIONAL STRATEGIC REFERENCE FRAMEWORK : 2007–2013. It was published in January 2007, so I assume it was written in 2006. Its quite an impressive document.

      After a quick browse I wonder how much of the work being undertaken by the TFGR is really necessary - much of it has already been done - by Greeks, with EU input. It also begs the question - what will Stournaras get from his IOBE and ???? chums that he doesn't already have.

      There are some interesting observations on Greece’s Position in International Markets on pages 10-11.

      What's lacking is not - not knowing what to do - this is just one of several documents I've dug up that clearly show that successive Greek Governments have known what's wrong with the Greek economy and the sort of steps needed to rejuvenate it.

      Perhaps there is some 'not knowing how to do it', but most of all I suspect its 'not wanting to do it'. I hope the time has come when the following prevails - Change occurs when the cost of doing the same is greater than the cost of doing the change But I wouldn't bet my socks on it, let alone my shirt.

      Maybe a Trans-Atlantic Partnership Agreement can save Greece - with ocean wide subsidies, an even bigger walled garden with a nice big lake for its ships to sail upon. With US support the EU could resurrect its beet sugar refineries, resume dumping its subsidised product around the world, and threaten to send in the drones when the WTO says 'Hey, we told you already, you can't do that!'.

      I recommend John Mauldin's two most recent "Thoughts from the Frontline" newsletters. They were written as a result of his January visit to Greece. Nothing much that we don't know already - but he's a good writer, who understands but doesn't worship the numbers.


    2. I, too, enjoy John Mauldin's newsletters. In his last one he talks about state pensions in California. Whatever happens in Greece, it is absolutely NOTHING compared to California. Just a short quote from that newsletter:

      "Consider California, where just 10 individual pensioners will cash $50 million in pension checks from state and local governments over the next 25 years. Already some 30,000 retired California government employees pull in pensions higher than $100,000 a year. One retired librarian in San Diego receives a $234,000 annual pension. Beach lifeguards in Orange County are retiring at age 51 with $108,000 annual pensions plus health-care benefits."