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Tuesday, March 12, 2013

A 'politically explosive finding'. Really?

This article describes the 'politically explosive finding' that Italians may be wealther overall than Germans. I have no idea whether or not that finding reflects reality. I guess there is really no way to accurately make such comparisons.

But there is one indisputable fact: when foreign debt enters a country, something happens with it. Part of it may leave the country to finance a current account deficit. Other parts may again leave the country as bank deposits in Switzerland & Co. But a certain part always remains in the country and is recycled via the budget to the country's residents.

What all these processes have in common is that money enters a country as debt and is converted into private equity while the public debt remains.

From 2001-10, 283 BEUR entered Greece as foreign debt (net). The current account deficit accumulated 197 BEUR during this period. So there is another 86 BEUR which went either into domestic private wealth or into bank accounts in Switzerland & Co.

If the foreign debt were to be forgiven, that private wealth remains private wealth.

PS: during my time in Argentina (1980s), the general rule of thumb was that the foreign financial holdings of Argentines were at least as high as the country's foreign debt.

5 comments:

  1. And yet, businesses in Italy are having problems borrowing from their all too timid banks. Were Italians to invest in their own startups and developments - this would make this argument explosive.

    Otherwise it's a distraction. The problem has been of investment, not lending.

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  2. It just goes to show how terrible the Euro has been.

    Let's not forget that during the time of our national currencies, we had to work to make sure that their value would not collapse.

    The Drachma was a weak currency, but not catastrophically so.

    Effectively, the public sector needed foreign reserves to buy Drachmas when there was downward pressure on the currency, and it got foreign reserves by having a roughly balanced current account (tame deficits to the tune of 3% of GDP). Thus, a level of productive domestic activity was maintained, and harmful credit booms were kept in check through high interest rates.

    The conclusion is that where national currencies succeeded, the Euro has failed miserably.

    Furthermore, the simple fact that Germany grew on the back of it's (unable to devalue) Euro partners should have been taken into account when considering what the options for aggregate demand are, instead of looking for demand outside the Eurozone. And Germany *was* in a good position to begin with, with it's tremendous productive capacity and industrial might.

    Europe has let us down.

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    Replies
    1. I can see how, particularly nowadays, everyone in the South thinks that Germany always had the sunny side up of economic luck.

      When I arrived in Munich in 2003 for my new job, Germany was in total economic stagnation and in mental depression. Prof. Sinn had just published his book "Can Germany still be saved?" Nearly every talkshow hammered in the theme that Germany was at the beginning of a steady decline. Unemployment was moving towards 5 million. (at the same time, the South reported wonderful growth rates in GDP and personal income).

      Today, Germany is indeed a shining star when comparing it to France or Italy. But I would encourage you to read, as I do, some of the 'progressive (leftist) blogs' in Germany ('Spiegelfechter' would be one of them). When you listen to those people (and I have no reason to disbelieve them), they will tell you how many millions Germans are in low-wage jobs where they can't support themselves with only one job. And I believe a staggering 18 million or so are in the category which is called 'below the income that one would need to have' (there is a technical word for it but I forgot it).

      Germany may have saved itself on the back of its Euro-partners but I don't think that Germany grew on their backs. Essentially, Germany had no real wage increases in, I believe, 10 years or so.

      Yes, I agree with you, the way the Euro has turned out, it has not been a good thing.

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  3. The 167.000 or so Euro of Italian weahlt are due to unreal pricing of the real estate market (which is deflating). It is money that cannot be freed (unless you go living in a tent).
    In my italian home town (seaside, no economic activity) you see 300.000 Euro for a small old 2 bedroom flat - way more expensive than in Switzerland for comparable location !
    In fact I argue the italian have negative equity - that is what small savings they have will be needed to compensate for the decline in real estate prices.
    Italy is going the exact same way as Greece: elections with no results, a "rebel" getting 25% of the votes etc. My forecast is that their destiny will be the same - many years of slowly degrading conditions and the usual brain flow.
    Unless Frau Merkel opens the wallet after the September elections...

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    Replies
    1. I do think that you are doing injustice to your country's economy.

      Italy has a HUGE economy and a HUGE industrial sector. An industrial sector which, in Lira times, often was a threat to the German industrial sector. Italy delivers brand names in all sorts of industries which are known throughout the world.

      If I recall, Italy's exports are about as much as Austria' GDP altogether! I haven't looked at these figures in about a year but I doubt that they changed so much since then. Italy's exports then covered 93% of imports! In comparison, the US was about 78% and Greece between 40-45%. And all of this DESPITE the fact that, due to the Euro, Italy has become much more uncompetitive than it used to be before. And DESPITE the fact that not all of Italy is economically strong. Instead, Italy had/has its own 'South' which the North has been funding for decades.

      I haven't been to the South of Italy in years but look around the North: impressive infrastructure, impressive cities, towns, etc. all over the place. And factories all over the place, too!

      The Italian economy doesn't need to be reformed from A-Z like Greece's. My gut tells me that if Italy did only half of what Germany did about 10 years ago, Italy would return to smooth sailing quickly.

      Regarding the wealth of Italians, one obviously has to bear in mind that what applies to Italians 'in sum' may be totally different at the level of individuals.

      Italians 'in sum' must be quite, if not very wealthy. After all, someone does own all the real assets which are all over Italy. Someone does own the deposits in Italian banks. Someone does own the world's second or third largest gold reserves. And, above all, someone does own all the gigantic volumes of financial and other assets which Italians have stashed away abroad.

      That, of course, doesn't do any good to the fellow who is economically suffering today. All I could tell him is that he is one atom in a larger part which larger part is quite, if not very well off.

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