Monday, November 14, 2011

Two interesting articles on the Eurozone and the EU (and Greece)

Here are 2 very interesting articles, one by Thomas Klau of the Irish Times and one by Prof. James K. Galbraith of the University of Texas. Below is a commentary which I posted to the article by Prof. Galbraith.

First, the sentence “the European banking crisis is the product of over-lending to weak borrowers” captures it all. One can argue about this, that and the other regarding the Euro-structure. At the end of the day, bankers get paid for making good decisions in the process of allocating financial assets. If they consistently make bad decisions, they should be fired. Instead, naïve and incompetent EU-politicians invited them to participate in solving the problem which they caused leading to today’s mess in the Eurozone (I don’t wish to mitigate the responsibility of borrowers in taking up more debt than they could handle but you first need to have dumb lenders before smart borrowers get dumb loans).

Greece, however, was not “merely the first domino in the line”. Greece was the absolute exception to the rule. There is no other country in the EU (possibly not world-wide) which has accumulated such horrendous consumption-driven current account deficits for over 10 years as Greece has (twice as high as the US). Without Greece, the Eurozone would still have the structural problems which it has today. However, without the excesses of the “Greek way of life” (corruption; tax avoidance and cheating all over the place), the debate would not be as emotional as it is today.

The process of recycling wealth from the richer to the poorer EU-regions (Structural Fund) worked quite well up until the Euro (and Greece was a major beneficiary of that). It was the arrival of cheap Euro-financing which killed the system.

What do the Germans reap rents of? They reap rents of the fact that for almost 10 years now, their middle class has seen very little by way of real increases in salaries & wages and that most of the new jobs created are low-paying ones. If one wants to blame Germans for something, one can/should blame them for their culture of wanting to do all the world’s saving without sharing in the world’s consumption proportionally. But one cannot blame Germans for, say, increasing automobile exports to the US at a time of a rapidly declining USD (EUR vs. UDS about +40% since the USDs peak in the mid-1990s). That, on the contrary, is an accomplishment!

One cannot compare the nationalizing of the US commercial paper market and the Fed’s monetary easing with the Europeanizing of the Greek debt. The US commercial paper market was/is a hugely liquid market of mostly very good borrowers and when the Fed buys Treasuries, it only prints money but does not buy credit risk. When the ECB buys Greeks bonds without a deductible, it buys credit losses (even though I recognize that they will have to end up doing that).

When the Greek government reduces (Troika-Report) wages/salaries/social transfer by 4% in absolute terms in 2011 and overall government expenditures by even 6%, that is a phenomenal achievement compared to other countries. However, when you hear that certain public sector employees have taken salary cuts of 30%, you know that some sectors of society have shouldered a far greater burden than others (and some haven’t shouldered any burden at all).

Despite all the selective waste, overall the Greek government’s expenditures (including interest!) are not out of line at all (roughly 50% of GDP compared with France’s 56%). It is government revenues which are out of line (39% of GDP compared with France’s 53%). Had Greeks as a society contributed proportionally to the state as much as the French, they would have had a budget surplus of 3-4% in 2010!

When Troika-specialists attack costs which are not really out of line overall, and when those cuts are as unfair as shown above, then you get the (justified) public uproar which you have today. Had Troika-specialists helped Greece to collect taxes instead (and not the taxes from salaried employees/pensioners who can’t escape taxes anyway), there would be public applause today. And there is no reason why the Greeks couldn’t have done that on their own.

Had Greece taken “brutal” measures to stop official capital flight via bank accounts in the last 2 years, she would have at least 50 billion EUR more liquidity in her banking system today. Had Greece taken more significant steps towards reigning in ridiculously high imports for consumption (perhaps even by substituting them with a bit of domestic production), things would be different today.

So my bottom line is: yes, there is a lot of responsibility which can be thrashed around at EU/German/French levels and with good reason, but none of that should free Greece to assume some responsibility for taking constructive measures on her own to get their economy in shape. Just sitting in the armchair and pointing the fingers at others is not the Judeo-Christian tradition!

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