Follow by Email

Saturday, March 9, 2013

An email exchange with Eleni Tsigante

I frequently have private email exchanges with readers of this blog. There, I formulate my thoughts a bit more bluntly than I do in the blog. One of my readers, Eleni Tsigante, sent me this article by Martin Wolf of the Financial Times. I responded to it and this triggered the following response from Eleni: "A magnificent summary economically and politically that brings us exactly to the present and this moment. I urge this (to publish it in my blog) because I know - for sure! -  that others will benefit too in the same way as I have". Well, I feel flattered, particularly since I have been saying similar things over and over again in my articles. But I am not above vanity and when told that others might benefit from my ideas, I only too willingly oblige...

QUOTE
Eleni, I am most familiar with the arguments of Wolf, de Grauwe, Münchau, Varoufakis et.al. They write in a very sophisticated manner. Krugman is more down to earth and states: “My expense is somebody else’s income. When I cut my expense, I cut somebody else’ income”. I guess even a teenager can understand that.

The intellectual arrogance displayed by some of the above often defies description. Wolf writes: “Because of its (ECB) refusal to act as lender of last resort to governments, they suffered liquidity risk”. Sounds great. But what he does not say is that lending directly to governments would be an outright violation of the ECBs statutes.

Now, the ECB and the EU have ‘bent’ statutes and treaties several times so far but they have only bent them, sometimes in an extreme way. But not so extreme that someone could sue them before the European Court (please note that the German Court has ruled the OMT as violating EU treaties!). An outright violation of statutes or treaties would immediately trigger law suits before the European Court.

When I suggested  a couple of years ago that Greece should implement import taxes and capital controls, Varoufakis immediately (and correctly) pointed out that this would lead to law suits before the European Court. When it suits his fancy, he sees the point. When not, he downplays its significance. That is not intellectually valid.

The OMT IS NOT a lending of last resort! It is a buying/selling in the secondary market to hold interest rates down (i. e. bending the rules). Yes, an earlier OMT could have made life easier for some countries, not for Greece, though!

For Greece, it is absolutely irrelevant what happens to its bonds in the secondary market. Rates there might as well go to 20% and more (as they have done). Why?

Because Greece has essentially been taken off the market since May 2010. Greece did not borrow in the market (with a few exceptions); Greece borrowed from the Troika. Admittedly, the Troika interest rates were far too high in the beginning and even a blind man could have spotted this (Bill Rhodes had hammered this into the microphones whenever he talked). They are now very low. Still, I would argue that they should be put to zero for, say, up to ten years. That would be a ‘haircut in disguise’.

In fact, debt and debt service have been absolutely irrelevant for Greece so far. Every cent of principal and interest was not paid by Greece out of its own resources. Principal and interest were paid by foreign lenders so that Greece could repay other foreign lenders (and Greek holders of bonds). This is now changing as Greece enters into the phase of a primary surplus. Now it will indeed become a question of what Greece does (or rather: has to to) with that surplus: pay interest or invest in the economy. I have written this and that about that. You won’t be surprised to hear that I suggested that the surplus should be invested in the economy.

Bank liquidity was never a real problem in Greece. Why? Because all liquidity which the banks lost (such as deposit flight) was replaced by the ECB. Greek banks don’t lend for the same reason why banks in other countries don’t lend in the midst of a crisis --- they don’t want to increase their risk. In fact, they actually do everything to reduce risk. That is in the nature of bankers everywhere. Bankers always act pro-cyclically (and, I hasten to add, Basel-2 reinforces that!): when the sun is out, they sell umbrellas. When the first raindrops fall, they chase for the exit door. What is true is that foreign banks no longer accepted the risk of Greek banks for trade credit as they had done before. That clearly was/is a problem, and I hear of not counter-measures for that…

The ONLY THING which mattered for Greece were the terms of the Fresh Money which Greece required to finance its primary deficit. Greece had no choice but to ask for and take this money. The ONLY VALID ARGUMENT is whether Greece had a choice in the terms/conditions for that money. Mr. Papandreou coined the phrase that Greece had no choice; that Greece simply had to do what was required of it by foreign lenders. I say that this was his greatest mistake. Greece would have had a choice. I am the first one to agree that Alexis Tsipras would have negotiated better terms.

I have been involved with IMF programs in Chile and Argentina. Their program has been standard for decades, namely: cut government expenses, reform and the free market forces will take care of everything else. They have been criticized for that for decades, too, but they insist.

In the case of Greece, the IMF – with undoubtedly a lot of prodding from the EU – went overboard with their conditions. My sense is that there was a notion of ‘setting an example with Greece’ and Greece was such an obvious case for setting an example. Except, the whole thing should not have been about ‘setting examples’ but, instead, about curing an economy.

Either way, whether austerity targets are overshot or not, if they are not accompanied by growth measures, then Krugman’s simple law of cutting somebody’s income when somebody else cuts his expense comes into full force. Remember that about half of Greece’s austerity came via cutting investments!!!

Where I disagree with Varoufakis & Co. is where they say that growth measures should have come from the government. I say that they should have come primarily through the private sector. A few large, government-financed infrastructure projects would, of course, help (they would also increase the deposits in Swiss banks of many of the people involved). But I think you would agree that the Greek economy will only turn for the better once the Greek private sector becomes the cash cow which the state needs. Don’t you? Still, this is a guessing game: Varoufakis & Co. may be right; I may be right. Probably we are both right in a way. The middle road would be to do both. But it is totally wrong to ignore one of the two!

Where I really start blaming the EU is that the thought of searching for ways how to increase private sector investments in Greece never even crossed their minds (and, I should add, I don’t remember journalists proposing that, either). That was/is unforgiveable and stupid. Stupid because they didn’t/don’t want to understand that the only way to get your money back from a weak borrower is by making him strong again. Of course, Greece, too, could have done quite a bit in that direction but if not even the EU comes up with that idea, one can forgive Greece for not doing it, either.

Having said all this, I agree that the OMT is, in the short term, good for countries which are not ‘on the program’ yet. It lowers their cost of borrowing which, as I said above, is one of the key factors. It doesn’t solve longer term problems, though. The key issue is that there are 17 countries which have made themselves dependent on a foreign currency which they can’t print, and their Central Bank has been given a statute where it can only act as a monetary and not as a political authority (which I think is good!). The only reason why the ECB has been pushed so much into political functions is because those who get paid for being politicians have failed in their job.

Maybe the good news is that Italy may fall apart. Italy can’t be saved by the Troika; there nature will take its course. If Italy falls apart, the damage will finally land where it belongs --- the banks. Confidence in a financial sector will only return once the market feels that the banks have valued their assets correctly. If Italy forces banks to value their assets correctly (resulting in giant losses), then we will see a moment of truth and then one will finally attack the debt problem at its source.
UNQUOTE

23 comments:

  1. I really like the last two paragraphs. I think they're among the best that you have written, if not the best.

    I have two questions.

    My first question is: the Eurozone is such a large area, comprised of 17 countries, having so much productive capacity, factories et al, that it can easily grow internally should it choose to.

    Why does it choose to grow externally then, following the German example, suppressing domestic demand and looking for external demand?

    The limits of said approach is that you always chase your own tail. As external competitiveness grows, the value of your currency goes up, which favors imports rather than exports (so that the system balances). Then you have to grow your competitiveness more, suppress domestic demand more, etc etc ad infinitum.

    When Germany had the Mark, this policy resulted in relatively high unemployment and low growth. With the Eurozone as a whole, the results are gonna be similar, with big imbalances from one country to another, and no fiscal transfers to act as absorbers.

    That won't work.


    My second question is: money is a medium of exchange. That's why if there's not enough economic activity happening (i.e. exchanges), like now, we can throw more money in the economy so that more activity takes place.

    Money also comes solely through debt, public or private, it doesn't matter. In order for money to exist, somebody has to borrow it (in the case of exports it's the people who import your products).

    If production increases (and it has increased tremendously during the last 3 decades: more cars, more gadgets, more houses, more this, more that), then more medium of exchange is required, and thus more debt (and of course it's flip-side: more income).

    Based on that, my question is, should we put less emphasis on debt (particularly public debt, since governments print the currency), or should we interfere in the distribution of income, so that debt is better aligned with the ability for it to be repaid?

    ReplyDelete
    Replies
    1. Let me try the first one first because it's a more practical issue than the second.

      First, I haven't looked at the figures in quite a while but the last time I looked, the external balances of the Eurozone (current account) were more or less in balance. So, Germany's surplus outside the Eurozone must have been offset by deficits outside the Eurozone elsewhere. From that standpoint, the Eurozone overall is in much better shape than, say, the US.

      The same goes for factories. There may be plenty of factories in the Eurozone but they are unproportionally distributed and unevenly efficient. And factories are where the bulk of the jobs are.

      Germany, since WW2, had an economy which has only been able to employ its people because it had so many customers in the rest of the world. Some attribute the relatively low domestic demand to the low level of wages/salaries. That may be part of the answer but it can't be the entire answer. Germany, in its heyday of the DM, had both: high wages/salaries and high external surpluses. Switzerland would be a similar case. Cultural issues like attitude towards saving/spending/borrowing must play a role. Also, once one gets one's economy revved up over the years/decades in a certain direction (i. e. exports), it can feed upon itself, I guess.

      Another reason I have experienced myself. I came to Munich in 2003 to run the German branches of an Austrian bank. I thought this would be a mission impossible: why would German companies need an Austrian bank??? Well, it was a homerun, instead. Why? The critical message from customers was always the same: "Our German banks have no confidence in the Mittelstand anymore. They cut their exposures to the Mittelstand. Instead, they feel much more comfortable lending to foreign countries and borrowers". Here you have it - had German banks lent much of that money to the German Mittelstand, there would have been more domestic investment and spending (and an Austrian bank might have been superflous...). The more they would have lent domestically, the less would have been available to lend to, say, Greece so that Greece could run giant budget and current account deficits.

      My own intuition is that Germany has too little of what Greece (or the US) has too much - a service sector. My critique of Greece's having too small a manufacturing sector is as valid as the critique that Germany has too small a service sector.

      I guess this was a long way of telling you that I don't have a clear answer to your question. There is a chicken-and-egg process in all of this, as I hope I could show. But it's obviously a lot easier to tell Greece to cut down on services than it is to tell Germany to increase services.

      Let me close with an anecdote. I came to the US (the rich Florida) as an exchange student. My host parents had a hardware store. One evening early on, they took me out to dinner. When I saw the bill of about 100 dollars, I nearly fainted because I translated that into Austrian Schillings and compared it to my father's monthly salary. But I was totally floored when I saw that they left a tip of another 20 dollars. That was huge money for me! I asked them afterwards why they had done that. Their answer? "First of all, the service was good. And then, these people do a lot of shopping at our hardware store and we want them to continue to do that". No way that this could have come out of the mouth of an Austrian. Neither a German! I was born and raised to think that such behavior would be 'waste'!

      Delete
    2. On your second question, I have often said that the high grounds of monetary theory are not really my cup of tea. One thing is for sure: debt IS NOT bad per se. On the contrary, debt can be very good for the economy for reasons you point out.

      IT ALL DEPENDS WHAT THE DEBT IS USED FOR!!! If it is used for buying an apartment block which generates enough rent to service the debt and still leave a profit, debt is excellent. Even better when it is used to start a new profitable business which employs people. However, when debt is used to pay for a vacation, disaster starts. Why? Because the vacation passes but the debt remains there.

      Yes, the income distribution is out of whack in many industrialized countries. Where I am short of ideas is how to best get it back into whack. "Tax the rich" is not a no-no to me (neither to Warren Buffett...). But in all likelihood, that revenue would not go to the lower income people but to other silly government expenditures, instead.

      Delete
  2. Herr Klaus a few observations.
    Steps for a total solution in an extremely complicated - difficult issue like the situation in Greece and other countries,explained by mr Wolf with a very simple logic. The important however is whether this solution answering to the core issue,( if let say their political point implemented) whether eg GR with specific problems today will change antilispsis of understanding mistakes or not?
    Because even in economy always the issue is to understand mistakes.
    The experience in Germany a decate ago shows that the changes in economy when have some quality standards do occasionally have results.

    My point.Internal devaluation in Greece is important equal to the need for foreign investment as you support and totally agree. Internal dev can happened without only reducing basic salary! Prices in Greece in many services products still are artificially expensive.
    H W Sinn in his article"A second change for european reform" underline that Germany cut its prices from 1995-2008 around 22% compared to european partners. Greece from projections need to cut around 30% as mr Sinn state or 39% as OECD supports.
    Here is the IMF summary about Greece

    http://www.imf.org/external/pubs/ft/scr/2013/cr1320.pdf

    In page 7/260, the diagram "Wages year on year percent change" we've seen prices adjustment around -15%, so we need more "internal devaluation" as long as foreign investments are relatively, so far, scarce.
    I want to stress here that althought the basic wage in Greece is practically on the level of Croatia the prices - seen in inflation- do not fall as in case of Ireland !

    https://docs.google.com/file/d/0B39Y2UeDAWHYV1Y2bm5HTm9Ea00/edit

    So deflation is a need for Greece not inflation! In December we have had the lowest inflation in EU27 ! Feb around 0 !

    But why prices in goods and services do not fall accordingly as wages in Greece?


    ReplyDelete
  3. It's the internal markets which government "struggle" to liberate but also FOR MY POINT the gas prices.

    Gas prices for car and heating -unleaded 95 etc are by far the most expensive after Italy and Ireland in all EU 27. Both in these countries basic salary is around 1000 and 1400 € !!! not 400-500€ as in Greece-Croatia.
    So why is that?

    see 8/260 "Contribution to HICP inflation the " Energy and unprocessed food" is the inflation!

    or here

    http://www.bankofgreece.gr/BogEkdoseis/sdos201211-12.pdf page 95/194

    http://www.bankofgreece.gr/BogEkdoseis/sdos201211-12.pdf page 91/194

    Inflation is created more in energy which is more than EU 27 average than Gr.We have less inflation than all 27 in other products without energy!

    Today Greece want from Troika to decrease the gas prices so as to improve revenues from taxes. Because when taxes are to the sky people cutting from everything!

    I am reaching to the main issue: Balance of payments.The policy implemented all these years had a target, to improve balance of payments, which is rational.From 2011 to 2012 reduced 75%, but with a negative-demanding way!
    However these policies do not have a practical result to cope with a hard recession where a growing number of citizens face huge problems for the basics.So with basic salary equal to Croatia and gas prices from the most expensive in EU27, from the higest energy costs in large-medium size companies(+40% from 2008) and VAT 23% in some services in tourism, restaurants and agriculture industry the ability to stabilize the growing fall in consumption INCREASING recession.
    Troika is made a mistake without stabilizing consumption we will still see hard recession.

    I am finishing. IMF/EU officialls do not try to create a "competitive" advantage" but they have an accounting antilipsis for economy AND not a quality targeting. Land registry should have finished in 2014 not 2020, the tax collection system should rescheduled from white page and tax collectors could be and from other countries!

    Universities in every city should be closed if not having a quality level standard equal to norhtern countries. (This is happening after 3 years)! Accordingly R&D from 0.6%/GDP could reach to 2% from various eu supporting funds-organitations.

    These are quality targets Herr Klaus! Then you will see foreign investments!


    About banking liquity y have a mistake. ECB is "recycling" our balances. But still we have the substitution from ECB, the much worst analogy loans-deposits and the NPL which is much worse than 2 y. Also the Cocos capital which is complicated (your son will know!) how is being implemented is destroying the private wanna be investors because the plan is not workable and create market istabillity. For the last i can tell y a lot.

    ReplyDelete
  4. Mr.Kastner, I fear, I have to comment, that you should read Mr.Varoufakis proposal more carefully. I cannot really understand, how, after so long time has past, since he has made the proposal, you still argue, that the ECB cannot be a lender of last resort because of its statutes. While this may be the proposal of other people, Mr.Varoufakis, has clearly not proposed this, but that the ECB should service the debt of sovereigns. He has always stressed out, the the importance of the difference of the two and why his proposal conforms with the current treaties.

    So please do not over-simpify the issue. If you have an argument against his proposal, then explain it. But nobody needs a discussion when it is not based on correct facts about the proposal.

    ReplyDelete
    Replies
    1. 1 of 2

      You are right with your observation that Prof. Varoufakis has not proposed that the ECB should be a lender of last resort to governments. I didn't want to imply that all the names which I cited (and others) always agreed on all points. They don't. Martin Wolf mentioned the 'lending of last resort', so I reacted to that. Varoufakis always takes great pain to argue that 'tax payers of the lending countries should not be overburdened with unreasonable proposals', and I am familiar with that dialectic, too.

      I am very familiar with the Modest Proposal from its original version onwards. I have said in this blog as well as in Varoufakis' blog (as well as in mails to him) that among all the proposals for stabilizing the Euro-crisis, the Modest Proposal with its 3-prong approach (ECB, Banking Union, EIB) may well be the best. You want me to go into specifics of each, so I will do that.

      ECB: to me, the revolutionary part is the idea of the ECBs raising money in its own name to service the debt on behalf of Greece. I don’t think anyone else has mentioned this before. Varoufakis says that this would not be communalizing debt. True, if all debts were to eventually get paid. Not true, if they weren’t. That was left unsaid but I am familiar with that dialectic, too. I discussed this proposal with the Governor of the Austrian Central Bank, a friend of mine. His clear-cut answer was: ‘not permitted under ECB statutes’. I privately informed Varoufakis about that and his answer was ‘depends on whom you ask’. I don’t know whom he had asked. I had asked a member of the ECB Governing Council, University professor and author of many books and he gave me a clear-cut answer. I don’t remember seeing anywhere in Varoufakis’ blog that perhaps the ECB proposal is not such a clear-cut case as he suggested. It may be possible, it may not be. But if one blasts the idea out to tens of thousands followers without any caveat, then it’s a dialectic which I am familiar with but which I don’t use myself.

      Banking Union: to me, this issue – while important – is far overplayed leading to a situation that some people dream of a banking union where all banks are liable for one another. To those dreamers, I can express a warning: one day, the liability could go the other way, too. The most highly leveraged bank in the Eurozone is Deutsche (leverage 40:1; if Deutsche were a hedge fund, it would be called a highly leveraged hedge fund). Should something ever happen to Deutsche, I wonder how happy Greeks would be to sacrifice their reserves and perhaps tax payers’ money to save Deutsche.

      Obviously, the key elements of a banking union can ‘only’ be a common supervisory authority and a deposit insurance à la FDIC. But deposit insurances have maximum amounts (in Austria 100 TEUR), and that’s it. The US has a national supervisory authority and a national deposit insurance and yet, almost 500 banks have disappeared in the last few years.

      EIB: the Modest Proposal creates the impression that the EIB requires a jump-start to lend to Greece. One of the commentators in this blog (Canutely King) seems to have a lot of knowledge about the EIB. He has frequently cited cases where the EIB would like to lend (and lend more) but the funds are not being taken down. Believe me, the ECB does not require a jump-start; it has enough resources as it is. What the ECB requires are projects which they can finance as a lender (the ECB IS NOT an investor). When asked about a possible project, Varoufakis referred to a TGV. Well, I would agree that a TGV is a better idea than a Formular-1 race track but unless all plans/blueprints/approvals were already in place for a TGV, that idea would not see a first new job in a long time.

      Delete
    2. 2 of 2

      Again, the focus of the Modest Proposal in its original form was to stabilize the situation. All growth measures which are implied would be measures through public and semi-public channels. The private sector does not show up. I once asked Varoufakis about that and he replied that in a situation like the present, only the public sector could jump-start the economy. On one hand, I marvel how Greeks can still have so much confidence in their public sector. On the other hand, this is not true. The private sector CAN become a locomotive (look up Chile under the Chicago-Boys) but for that to happen, one has to discover the existence/importance of the private sector in the first place.

      Interestingly, I remember that, after reading the Modest Proposal for the first time, I posted a simple question in Varoufakis’ blog. It was: ‘who will finance Greece’s current account deficit?’ His reply was something like: ‘the private sector, as it has always done’. The good news was that he mentioned the private sector. The bad news was that he mentioned it in the wrong connection. The private sector (i. e. banks) will NEVER voluntarily finance a current account deficit when a country has external payment problems (as we have seen in the last 3 years where the ECB had to do that financing). To suggest the opposite is a dialectic which I am familiar with but which I don’t use myself.

      Varoufakis correctly blames the denial-approach of EU-elites. There is an interview with Varoufakis from 1993 on Youtube where he says something like: ‘the Greek economy has been in terminal condition since the 1970s’. Today, he says that ‘this crisis has nothing to do with Greece’ (and thousands of followers get elated). I have a problem when one blames others for denial while doing a good job at denying oneself.

      In sum, Prof. Varoufakis clearly has a brilliant mind and a fantastic way to express himself verbally and in writing. I think that if EU-politicians had executed his Modest Proposal when it was first proposed, the EZ-debt crisis would have come under control for a while (not forever!). I also think that his recent article that “Europe needs a hegemonic Germany” is very much along the lines what I write about.

      Having said this, I have two requests for you:

      * please show me one article by Prof. Varoufakis where he proposes an agenda of what Greece could do on its own to improve its situation (like becoming a better place to do business)

      * please show me one article by Prof. Varoufakis where he proposes how Greece could obtain new private sector investment from abroad (or where he discusses private foreign investment in the first place)

      There may be some. If there are, I have overlooked them.

      My specific criticism of Varoufakis rests on the one-sidedness of his passionate (and seductive!) views. When one is Greek, blessed with enormous intellectual talents, when one has 50.000 followers (many of them followers in a religious way) – well, then I would expect that one also proposes a perspective what Greeks could do to help themselves. Here, Prof. Varoufakis could learn from Alexis Tsipras.

      The article linked below used to be the Nr. 2 in my blog as regards the number of readers since inception. Meanwhile, it has moved up to Nr. 1.


      http://klauskastner.blogspot.co.at/2012/06/hybris-of-prof-yanis-varoufakis.html

      Delete
    3. Mr. Kastner, if I may be allowed, I think that you misunderstand two things that Varoufakis is saying.

      Firstly, you ask why do Greeks have so much faith in their public sector. The answer is: they don't. But they have even less faith in their private sector, it's abilities to create value, and the distribution of the meager value that it creates. Varoufakis is Greek, you are not.

      And of course Varoufakis is correct when he states that in the state where we are now (credit contraction, not enough aggregate demand) only the public sector can jump-start the economy.

      Secondly, when Varoufakis says that the private sector will finance the current-account deficit, he means just that, that it's the private sector who is going to pay for the imports, like always. He isn't necessarily referring to those huge current-account deficits/ capital-account surpluses that Greece has had during the Euro years.

      Delete
    4. Regarding the current account deficit, not quite. I was not referring to the past at the time. Since I didn't find anything in the Modest Proposal about the future current account deficit, I asked that question. I was baffled when I got the answer that the private sector would do that because that was either completely overlooked in the Modest Proposal or simply naive to say.

      Regarding the private sector in general, it doesn't really matter whether Greeks like or dislike it. The simple fact is, as I said in the post, that Greece will have to have a private sector to fit the role of the cash cow which the state needs. No alternative to that. The state is unlikely to become a cash cow, don't you think?

      What I really hold against Varoufakis (and most everyone else in Greece) is that he never really discussed the McKinsey 'Greece Ten Years Ahead' report in his blog, even though I asked him to do that. There were recommendations for over 100 projects creating 500.000 new jobs over 10 years plus 50 BEUR incremental GDP. Now that, I think, would be a lot more than any public sector jump-starting could accomplish. And lightyears more than a TGV which is not even in the planning stage yet, I understand.

      Delete
  5. Ok, for what i wrote there isn't an answer?

    MS

    ReplyDelete
    Replies
    1. I can give you a reaction but not an answer because I don't see the question.

      Yes, internal deflation seems to be the only way to go if one cannot devalue one's currency and if one has become too expensive. I guess what was not foreseen in Greece is that internal deflation would be so unevenly distributed throughout the population. Had there been a Drachma and had that Drachma been devalued, everyone would have equally shared in the loss. With internal deflation, we see today that some shoulder an undue amount of the pain and others may even profit from it (like those supermarkets where we shop and where prices today are higher than 3 years ago).

      However, I wouldn't bank everything on the idea of having to become cheaper. Cheap wages/salaries can also also mean that the output isn't worth more.

      Last fall, I went to buy a little electric grill for the balcony. They showed me all sorts of fancy imported grills. I asked whether Greece didn't produce any electric grills. They told me that, yes, Greece did, but they were poor quality. Now, I have no idea what the secret is behind producing a high quality electric grill and why Greeks couldn't do that. In short, I think some of the quality issues you mention can have a far greater impact than cutting wages/salaries to the bone.

      I agree that the Balance of Payments, above all the current account, is one of THE key issues for Greece. A lot of answers for the structural problems of the Greek economy can be found there. I have written about this in this blog ad nauseum.

      Delete
  6. The internal devaluation have a result so far -15% To achieve 30-40% as a real adjustment is extremely difficult. Internal dev might not be equally necessary to 30-40% if 1) attract fdi 2) improve easying of doing bussiness (land registry) 3) increase r&d which is an example for poor quality grills.4) Watch which taxes might have a quality result in improving the bussiness climate.

    However I mention deflation because if you see

    http://www.bankofgreece.gr/BogEkdoseis/sdos201211-12.pdf

    page 95

    you will see inflation in energy is much higher than eu 27 aver and in goods services is the lowest of 27!

    The adjustment for deflation might come much easer than a demanding huge tax burden, not equal to the real economy

    Definitely the internal markets do not work eg supermarkets do not adjust prices,

    but see a) gas prices for heating -cars where Gr have 10% reduced revenues b) companies energy costs which are 40% higher than 2008 c) In a country with mil tourists restaurants working with a 23% vat and destroyed their revenues 30-50%.

    Reducing the 1,1 euros TAX BURDEN to the 1,75 gas prices the ”profit” can be used more productively?

    Look at the USA economy costs and compare.

    The question is to become cheaper or to watch also the always negative rate of consumption?

    I suggest you read this

    http://www.levyinstitute.org/pubs/wp_651.pdf

    In order to tackle the ongoing recession of -5% what can we do to tackle the depth of recession?

    To stabilize the consumption?

    To create a “competitive advantage” eg in gas prices so as to give an opportunity for most people, an incentive for bussinesship?


    MS

    ReplyDelete
    Replies
    1. Herr Klaus, do you understand my point, "question"?

      MS

      Delete
    2. Of course, I understand your point. Intellectually I agree with you. Prof. Sinn has been arguing similarly since the beginning. Even today he says that Greece still has another 20-30% to go to become competitive with Turkey.

      In one of my first articles, I argued for a mixture between Grexit and internal deflation. My point was: if Greece had to become 30-40% cheaper through pure internal deflation, social peace would fall apart and there might be revolution.

      Greeks have remained more peaceful than one could have expected. But another 20%? Below is my article of September 2011.

      http://klauskastner.blogspot.co.at/2011/09/endgame-for-greece.html

      Delete
    3. So quality targets for the members of imf eu is the issue today. I do not blame them (probably the only Greek) for anything, they made the best they could. Only 1% mistaken for not setting first quality priorities, in people, procedures, practices, creative mind.

      Balance of payments have improved 75% from 2011 to 2012

      Utsav Kumar in Hesus Felipe in link of levy inst if y read it saying important thinks about "internal devaluation"

      Practical things need to change such as the taxes in energy, transportation, so as imf eu to have good ROI, not to give only money!
      15-20 bil are out of the banks.Imagine 30% of them to invested in the simpliest inestment, multiplier would be positive?
      If we manage to stabilize the recession in 2013 to less than 3% (2012 was 6.4%) we could make a lot in 2014, but with quality targeting. Consumption need to turn to even a bit stable-positive.

      MS

      Delete
  7. When I first came across Varoufakis' paper "A Modest Proposal...", I immediately thought of the original pamphlet written by the Irish satirist Jonathan Swift around 1730, its full title was "A Modest Proposal for Preventing the Children of Poor People From Being a Burden to Their Parents or Country, and for Making Them Beneficial to the Publick"

    So I was hoping for something in the style of Swift or Defoe, maybe even a parody thereof. Alas its same the same ol' refrain - Balance of Payments, Current Account Deficits, Structural Reforms, Good Banks, Bad banks and In-Between-Banks, Alfabet Soop, tra la, tra la.

    I did have a laugh at his suggestion that Greece borrow some money from the EIB to build high speed train links - why would they want to do that? Because Spain did it perhaps... or because China's doing it - heck why not go the whole 9 yards and get a mag-lev train. Trouble is that Yanis V is serious... The only TGV trains Greece should buy are those made by Märklin.

    I discovered a Eurozone Mediterranean country that appears to be doing rather well... it's called Malta, perhaps you've heard of it ;) It just voted in the centre-left, its been centre-right for a decade or more. Its economy looks like its much better shape than its neighbours - by some measures its second only to Germany. So what's Malta doing that Greece, Cyprus etc aren't doing? One thing that struck me it that it only joined the Euro in 2008 - so maybe it didn't fall into the honey-pot, or maybe it was in better shape when it joined up. It surely deserves examination by someone other than me - 16,000km away in a straight line, and at least 40 hours in a plane.

    For the record - I don't have any inside knowledge of the EIB, all my information comes from the public domain, most of it from the EIB website. I don't have, nor have I ever had any contact with anyone who works for it.

    It is 'amazing' to me that Yanis V and the rest of the Greek commentariat should have so little apparent knowledge of the EIB. I suspect the truth is that their collective agenda includes keeping their followers and acolytes in the dark - just like anyone with an agenda these days. In Australia they use an expression "...treat people like mushrooms, feed 'em bullshit and keep 'em the dark..." - I don't know whether its used elsewhere.

    I read that the level of bribery in Greece at the personal level is down, that's good - lets hope it bubbles up to the higher levels (trickle down is a myth - at least as far as money's concerned). And I read that the tourists who stay the longest and spend the most per capita in Greece are - Aussies, Canuks, Yanks and Russkis - in that order.

    CK

    ReplyDelete
  8. Hallo Klaus,

    One thing I think I have to correct:

    "But not so extreme that someone could sue them before the European Court (please note that the German Court has ruled the OMT as violating EU treaties!)."

    I am pretty certain the German Constitutional Court has made no ruling on OMT. They have a constitutional complaint on file for ruling in 2013 on it, but they refused the request of the complainants to roll the (then newly-announced) OMT into their interim judgement on the ESM and Fiscal Pact, back in September 2012.

    The general expectation amongst german legal commentators appears to be that the Constitutional Court (BVerfG) will have to refer that complaint on to the European Court of Justice (ECJ). Which is something that the german Constitutional Court has not, up to now, ever done.

    But clearly, a german court can't rule on the legality of the ECB. And in fact, the german general counsel at the ECJ has started criticising the Constitutional Court for its stubborn refusal to refer cases on - which is what most national supreme courts do.

    http://www.europeonline-magazine.eu/deutsche-generalanwaeltin-am-eugh-kritisiert-verfassungsgericht_268639.html

    ReplyDelete
    Replies
    1. I found this post which I had written on the subject back in September.

      http://klauskastner.blogspot.co.at/2012/09/carrot-and-stick-of-german.html

      My memory is no longer good but if I recall, the interim judgement on the ESM DID include a ruling on the OMT (which reminds me that the final judgement should have come within a month and I don't recall seeing one).

      Obviously, the German court's ruling for the ECB carries no legality in the sense that such a ruling would have to come from the European Court. But it is an indication that constitutional lawyers somewhere have their doubts about the OMT.

      I feel sure that, should there ever be a clear, outright violation of statutes or treaties, all legal hell would break loose.

      Delete
  9. Yes. My legal knowledge really isn't enough to judge this well. I can read the judgements, but this is really hard material to understand.

    The interim judgement from September is here (in english summary).

    http://www.bundesverfassungsgericht.de/en/decisions/rs20120912_2bvr139012en.html

    It doesn't mention OMT specifically. It certainly confirms that the ESM can't place its bonds with the ECB, or get a bank license.

    The final judgement is still outstanding, yes. And they do seem to have extended it to include OMT.

    http://www.bundesverfassungsgericht.de/organisation/erledigungen_2013.html (and search for OMT)

    The fact that they're taking their own sweet time coming to a judgement is probably the background to the Counsel-General recently criticizing them. Because the operations of the ECB are, it's quite crystal clear from the ECB Statutes, under the jurisdiction of the ECJ, not the GCC.

    (Oh boy, what an alphabet soup this crisis is! I can't believe I've just written, what I've written, and hope to have it understood).

    ECB Statute, Article 35: Judicial control

    "The acts or omissions of the ECB shall be open to review or interpretation by the Court of Justice of the European Union in the cases and under the conditions laid down in the Treaty on the Functioning of the European Union. The ECB may institute proceedings in the cases and under the conditions laid down in the Treaties".




    ReplyDelete
    Replies
    1. I found this post which I once wrote about the legalese in statutes, etc.

      http://klauskastner.blogspot.co.at/2012/09/comments-on-esm-treaty-from-non-lawyer.html

      Delete
  10. thanks. I responded in that post. I certainly agree a lot of the language is alarming, and implies a legal loss of sovereignty.

    In that, it's simply recognising the "facts on the ground". A sovereign state that calls in a Lender of Last Resort has lost a lot of sovereignty. Something we see play out every week, in the politics of every program country.

    ReplyDelete