Thursday, June 28, 2012

A new recipe for periphery - export to them free of charge!

From 2007-10, German exports to Greece were about 29 BEUR. Let's assume, roughly, that for the entire time of Greece's membership in the Eurozone, German exports were about 100 BEUR.

If and when (or only when?) the moment of truth comes and Germany has to take its losses on Greece, those losses will easily exceed 100 BEUR.

What would this mean?

It would mean that Germany has been sending exports to Greece free of charge since Greece joined the Euro. At the same time, these exports - everyone argues - contributed so much to the well-being of the German economy during this time. Now: if these exports would in the final analysis not get paid for but they, nevertheless, contributed so much to the well-being of the German economy, there can only be one conclusion from this regarding the future: 



  1. I propose something more "european". Exchange the favour.

    So, it is not so bad after all! But! You will ask: "How do you make Germans accept that?". Well, one way is default. Another way, is, do the "American thing". Postpone the payment of say 100bln for 50 years. After 50 years, Germany will pretend that the debt isn't there (just like Greece pretends that war reparations and the forced loan from the bank of Greece never occured). "Magnanimous like a German" will be the word that will spread all over Europe! On a small clause: Greece will keep purchasing only german weapons (become again the best client), once it has recovered and that Germany will be able to keep recycling some of her EU structural funds to Siemens and Hochtief through projects in Greece.

    It is a win-win situation!!! What about the german taxpayer you may ask? Well, there could be an one-off tax to german banks, HDW, Krauss Maffei, Hochtief,Siemens for having profited so much from the irresponsible greek spending.

    1. 1 of 2

      The articles by Jacques Delpla and Thomas Fricke are about a year old. Had one suggested at the time that not everything these brilliant economists were opining was sensible, one would have been up against mainstream economists. Today, with the additional benefit of hindsight, some of their irrationalities (if not sillinesses) are obvious.

      That a person in a repectable position like Delpla would publicly spread the rumor that Germany might owe Greece 575 BEUR from WWII is the epitome of irresponsibility. Every sensible politician agrees that the issue of war reparations is dead. The issue with a loan which Greece was forced to make to Germany seems different. Legally, Greece might have a case there. But this is not an issue for journalists or economists (or bloggers like me...) to rule on. One goes to European courts and gets a judgement. That's how a state of law works.

      Prof. Ritschl's interview, which I had published at the time in this blog, is a good one. Some of his German colleagues take his points apart but it would, nevertheless, be interesting to see them debate one another.

      I belong to those who think that a structural current account surplus is just as much an issue as a structural current account deficit. Yes, Germans should import more and Germans should spend more money as tourists abroad --- but who is to force them and how if they don't want to do it?

      Just like a current account deficit is not bad per see depending how it is financed and how the money is spent, a current account surplus is not bad per se, either. It depends how the surplus is used. If it is lent to importers so that they can pay for those exports, that becomes chancy over time. If it is used for investment in the countries which import, then it is actually an optimal meeting of mutual interests. For that, however, the importing country must offer business conditions which are likely to attract foreign investment.

      I am always baffled by the self-centered view of "old Europe". There seem to be a lot of people who think that we are the center of the world's activities. Well, much of the rest of the world considers Europeans the "laziest people in the world who are only interested in improving the welfare they get from their states". If a country like France does not soon start to realize that the major competition is in the rest of the world and not within the Eurozone, it will soon find itself in Greece's footsteps.

      I lived in Germany when, in the mid-2000s, Germany was declared as the "sick man of Europe". And sick they were! A prominent economist wrote a bestseller titled "Can Germany still be saved?" The Social Democrat Gerhard Schroeder did realize at the time that Germany had to prove itself foremost in the rest of the world. The "austerity" which he imposed on hitherto spoiled Germans was daring (and eventually cost him his job). He basically said to the unemployed Germans "you have to pull more of your own weight because the welfare state can no longer afford to do it; period!" The bulk of the German "miracle" of the last years, i. e. the unbelievable decline in unemployment, can be found in low-paying jobs. Was Schroeder right to do that? I don't what what else he could have done to avoid a break-down of the German welfare state. Far more than half of Germany's business is done with the rest of the world, i. e. outside the Eurozone. If Germany failed there, there is nothing within the Eurozone which could make up for it. Germany could, of course, focus on being loved within the Eurozone but that would not generate the resources necessary to pay for pensions and social services (and transfers to others...).

    2. 2 of 2

      Is Germany profiteering for the EZs problems? I guess one could say that when looking the the extremely low borrowing rates. But one wouldn't need a EZ for that. It just so happens that, particularly in times of crisis, the markets reward those who represent a lesser risk.

      Those people who claim that the stronger ones should give up some of their strength so that the weaker ones don't fall behind so much ought to have their head examined. Yes, the stronger ones should put up some of the fruits of their strength to make the weaker ones come along faster in their development and this is exactly what the net payers into the EU have done for decades now (Greece, for one, received 135 BEUR in EU-grants since it joined). Some net receivers invested those monies wisely and they now bear fruits from it. Others wasted much of it (my understanding is that Greece belongs to the latter group).

      A last comment: Germany has accounted for about 15% of Greece's current account deficit in the years 2007-10. Well, there is another 85% who have also "profiteered" from Greece. Who are they?

    3. Dear sir 9:03 PM,

      I don't speak german or french, but i guess it is the usual SYRIZA/Independent Greeks story. I can only tell you that unless they come to power to show what they are really intending to do about that, it will remain a story.

      Or to put it in another way "Vae Victis" or as we say "after leaving the counter, no error is recognized".

      Politics don't know sentiments or "favour exchanges". It is about profit. They take care of theirs, it is our job to take care of ours.

      The rest is good for SYRIZA-ANEL tv panels. Something more pragmatic is needed.


  2. Imagine the benefit to the german image throughout the world.

    Instead of this:

    You Will have: "Germany, the forgiving mother of Europe and her loving terms to Greece".

    It would be a tremendous PR boost! A place in history!No?

    1. May I suggest what real Carthaginian terms are when a country hits external payment problems? They are not set by a country (Germany for example). They are set by markets. Money flow from abroad stops; period. Thus, the country must overnight bring expenses abroad in line with revenues abroad (= balance the current account). There is a multitude of such examples in the last few decades (Latin America in the 1980s for one). See this link for Prof. Velasco's speech:

      In 2008, the last "good" year, Greece's expenses abroad were 101 BEUR while its revenues abroad were only 66 BEUR. Overnight, 35 BEUR would have had to be saved somewhere. Where? Perhaps cars, motorbikes, smartphone, foodstuffs, etc.? A pure nightmare!

      How could that be avoided? Because Greece belonged to the Eurozone; just as simple as that. The Eurozone (ECB) not only provided continued funding for the current account deficit but also for the massive deposit flight experienced in the last 2-3 years. So, as you can confirm in the video, if one says to Prof. Velasco that Greece has a massive financial crisis, his response is something like "what crisis?" His home country Chile knows what a financial crisis is and I know it, too, because I lived in Chile during one such crisis.

    2. Dear Mr. Castner,

      Correct. They are not Carthaginian compared to a plain default in 2009. Of course, it wasn't out of solidarity, but because the banks that would go belly up in EU would also suffer a similar fate. The EU simply made the calculus: what i lose by buying time through a greek program - what i lose if my banks explode now. And the result was that it was more profitable to buy time, through an unrealistic plan. In Greece there is a proverb to this "for the sake of the basil plant, the flower pot also drinks water". Where the basil are the banks and Greece is the flower pot.

      They are Carthaginian compared to Germany's position after WWII, but Greece isn't Germany and Germany isn't USA.


    3. I think one must be careful when using the word "default". I have read from even Greek university professors that "Greece should declare default". That is about as silly as a borrower repudiating its debt. A borrower may "allow default to happen" but it never declares it (it's the lenders who "declare" it). Since there is so much confusion about the terms involved, I once wrote this paper about them.

      Yes, I, too, think that Greece should have allowed - had all rescheduling negotiations failed - default to happen back in early 2010. It should have publicly made every effort to avoid default by offering its creditors the kind of rescheduling terms which have become customary in the world outside Europe over recent decades but it should not have been afraid of default.

      A "normal" reschedulung would have meant: (a) existing private creditors hold on to their risk but move the maturities way out into the future and lower the interest rate or even capitalize interest (i. e. no indirect bail-out from tax payers); (b) Fresh Money (i. e. new loans) only for the amount of deficit which Greece needs to finance (thus much more "saleable" to tax payers"); and (c) assurance that sufficient trade credit remains in place.

      As I have said, this has been done innumerable times in the rest of the world in recent decades. The IMF is the institution to quarterback such procedures because that is their job and they have the blueprints for it. And Greece would not have become a "special case" but just the "normal case" of a country with external payment problems.

      Thus, Carthagena would have been avoided (i. e. trade credit would have remained in place) but Greece would nevertheless have had to adjust/reform its economy and state.

      There is absolutely no way for Greece to avoid some major adjustments/reforms, with or without the Euro. With the Drachma, those adjustments would come more rapidly, less traceable and, probably, long-term more effectively. With the Euro, they will mean a drawn out deflationary process with uncertain outcome because there it is not the "market" which would dictate change but, instead, the Greek government which would have to bring it about.

      Regarding Germany after WWII, I agree that Germany was treated very well. But it's the old game of "one hand washes the other and both wash the face". The "favors" which the US granted to Germany were among the best foreign investments which the US ever made.

      Jean-Jacques Servan-Schreiber wrote a book in the 1960s titled "The American Challenge". That should be read again today by EZ-members. His plausible thesis was that the "seed" of debt forgiveness and Marshall funds set off an economic explosion in Europe of which the US themselves were the greatest beneficiary. He described how US corporations later could "conquer" European markets not with their own money but by borrowing the money of Europeans themselves to finance those investments.

      So, Germany after WWII was to the US something like Apple was to its original investors: a fantastic place to put money in! Or phrased differently: the "favors" for Germany were like an investment in Apple. Just like the Apple investors could have lost all their money, the US could have, too. The opposite happened in both cases because the recipients of the monies had very good and profitable ideas as to what to do with them.

    4. "I think one must be careful when using the word "default". I have read from even Greek university professors that "Greece should declare default". "

      This is probably due to some professors not being so familiar with the english wording of the terms. The description of "default" in greek is a bit complicated, forcing economists to usually use the english term even when speaking in greek. The closest wording in greek is a more stretched "failment to pay". But "selective default", is usually described in greek as "selective bankruptcy". At the end, there are various people, who due to lack of familiarity with english terms, find themselves in problems when trying to write about it in english. After all,there are still, several greek professors that don't speak decent english or they speak other languages.

      Mr. Schreiber isn't saying anything new. The US after WWII would have been full of unemployed Americans (ex soldiers) if it wasn't for the Marshall Plan. The US even gave every returning soldier a free purse of study to choose any university faculty so that they could artificially reduce unemployment. Not to mention that US was creating the image of "world benefactor", which was very helpful in her Cold War plants, in using Europe as a shield against USSR.

      It's always the "one hand washes the other", it's not out of charity. The difference is how the population, press and politicians handled the matter in two different ways. I personally keep german newspaper frontpages and german politician statements in my archive for educating purposes for my children to see when they grow up and ask me about a certain subject.

      That there is no way for Greece to avoid reforms, is obvious...Greece has already defaulted 5 times in the past, we know what happened each time.

      But, the problem is,when the population doesn't see " a light", you risk to destroy even more the country by following the "slow path" of the current program. A return to the drachma, as painful it may initially be, would FORCE many things immediately (increase in local production, decrease in imports, return of bank deposits, a zero level from local and foreign investors who wouldn't have to wait longer to see what will happen, etc).Inflation would be a problem, but if the economy restarts, it can be handled.


    5. About a year ago, I published an article in Austria where, for the first time, I insisted on my view that a Grexit would be the worst possible case for Greece. Why? Because the immediate financial loss to Greeks would be so high that social peace and even democracy could become endangered.

      Had someone told me a year ago that Greece would one day see unemployment over 20% with about 50% among the young, I would have prophesized the risk of another civil war.

      Today, I have to admit that I totally underestimated Greece's ability to live with social and financial strains. But I also overestimated the ability of Greece's leadership to bring about changes.

      Hope dies last and I still have not given up hope entirely that miracles might occur at last and that Greek leadership will bring about the necessary changes. But I have to take note of the fact that about 3 months ago I wrote a piece arguing that Greece has crossed the point of no return. So I give it perhaps until the end of the year before I make a U-turn on the Grexit issue.

      One thing is clear (and you seem to agree with me): change must occur and if Greek leadership is incapable of bringing it about, a Grexit would do that in no time at all.

    6. Mr. Kastner,

      Greeks, when united, have survived situations that the current one seems a joke. In 1922, a bankrupt Greece of 5.000.000 inhabitats, had to feed 1.500.000 refugees from Minor Asia, who were literally living in tents with no money at all (most thought of saving their religious icons) all over the country. In Athens alone, the tents where arriving up to the Acropolis and people were packed even in the Athens' theatre. In less than 10 years, everyone had a house of his own.

      Again, after WWII, Greece had lost 25.000 males in war, 10% of the population in famine or executions during the occupation and after that, another 100.000 in civil war plus 800.000 that were internally discolated to other villages away from the battle field.

      The real danger is the division in the society. The 1922 situation came after social division. The civil war too.

      Today, you have political parties openly calling the others "traitors", "who sell the country", "germal collaborators", "troika slaves", etc.

      Greece, even after a hard default, can at least feed herself (the president of agricultural cooperations said that they can currently cover 90% of domestic needs and if they don't have to compete with dirt cheap egyptian potatoes/chinese garlic and the likes, they can easily raise it). Meat will take a bit longer, since again, the balkan meat comes much cheaper.

      The problem isn't the unemployment itself. It is the political animosity that is rising. Those who voted against the "memorandum parties", now will hold responsible those who "voted the memorandum parties" for whatever bad will find them. And this is the problem, specially in a country where Kalashnikovs are very easy to come buy.

      My hope for miracle is for New Democracy to surpass itself because of political survival instinct. It's the only thing that MAY make them go beyond political cost.

      But either way, the debt as it stands now, won't stay like it is. There will be either a new haircut or debt prolongation in time. Otherwise, a political suicide will await greek parties. Even if Greece was to catch double digit growth numbers, we do NOT have the right to take all that only to repay the ridiculous mountain of debt that of course, Mrs Merkel would very much like it to pay. Sooner or later, the Reinhart/Rogoff rule will catch up to Greece or maybe a world crisis and once more, Greece will be the first to fall. And what will we tell our children? "Yes, there was a credit event back then and yes, we were cut off the markets for 15 years, but we didn't really cut our debt to sane levels". No. This has already happened many times. I do understand that for Mrs Merkel having saved the banks plus the Greeks repaying this mountain would be the ideal scenario, but, we have to see our own ideal scenario at some point. Either there will be a compromise somewhere or i too will vote for someone like Independent Greeks.


    7. "One thing is clear (and you seem to agree with me): change must occur and if Greek leadership is incapable of bringing it about, a Grexit would do that in no time at all."

      This is also the opinion of several greek economics professors that teach in foreign universities. The Grexit, would be "liberatory" in a sense. At once, KKE, SYRIZA, Independent Greeks and Golden Dawn would be stripped from their rhetoric. There would be only one way to go, just like all the other times that Greece defaulted. No more easy throne stoning to the goverment and promicing Mr. Tsipras' green pastures where happy public servants eat grass. No more bank deposit bleeding, no more need to wait for foreign investors, no more 200.000 people outside the Parliament shouting "traitors" or "burn it down".


    8. Let me make one point very clear (and my blog is full of articles to that effect): the prinicpal problem (or challenge I would prefer to say) for Greece IS NOT its sovereign debt. The principal challenge is to transform its economy from a controlled, crony-driven, corrupt economy depending on funding/subsidies from abroad into a well-functioning, market-driven economy which generates value so that Greece ceases to depend on the funding/subsidies of others.

      The sovereign debt problem is comparatively easy to solve. For that, you need a few hundred people in a conference hall who can agree on something. The tough part is to transform the economy.

      Why is the sovereign debt per se NEVER the principal problem? Because debt per see is not a priori bad. It all depends what it is used for.

      No one wants to see a country which looks like it can service its sovereign debt repay it. If a country doesn't look that way, everyone wants to have the sovereign debt repaid yesterday.

      Just be learning from other countries (i. e. Mexico), Greece should take that portion of sovereign debt which is more than it can service (for example debt over 60% of GDP), convert it into an evergreen bond for, say, 99 years and have the interest capitalized for the first 10 years or so. Certainly no haircut because you always want to offer your creditors benefits and to tell them that they can hold on to 100% of their legal claim is something which doesn't cost Greece anything and is worth a lot to creditors. So in economic terms, this is equivalent to a haircut for at least the next 10 years (no interest expense flows through the budget).

      Will those evergreen bonds every be paid in full? Of course not, but that is besides the point. The point is that this debt has a certain value today. My guess is that that value would not be all that much above zero percent. However, if Greece turns the corner and the economic future becomes bright, then that debt might at some point trade around 20-30%, or perhaps even 50% or more. And if that were to happen, the holders of that debt would have made a killing. That possible perspective is exactly how something like this can be sold to creditors.

    9. Mr. Kastner, i agree with you, but you see things as an outsider. My long posts aim to give you a political and social perspective of the matter too. Most Greeks before the crisis didn't know anything about economic figures, but they do understand "debt". This is a argument of political debate. The greek housewife that sees television, can't know and can't understand that a new regulation of the debt MAY occur in SOME way in an undetermined future. She understands that Mr. Venizelos one day came back triumphant and said "We had a glorious day with the PSI, we have finally made the debt sustainable under the most severe scenario". Then she switches to another channel and she understands in a panel of 10 economists, half of which aren't in Greece, so have no political gain, that Mr. Venizelos is telling jokes.

      And you also have an angry 20 year old without job, who is brainwashed by KKE/SYRIZA/Ind Greeks everyday and tell him "We will delete the majority of the debt, 165% is unpayable, vote us, the others are traitors".

      There is an economic theory and there is also a political reality. It's not the economic theory that may lead to dangerous situations in Greece, but the political and social reality. If you could speak greek and read newspapers' comments or Twitter comments, you 'd understand what i mean. When you see people in Twitter addressing MP of New Democracy with "hi traitor, are you going to sell everything off to pay the debt", you can say whatever analysis you want, but yours is a theory, theirs is the current reality. Same if you watch greek television and see the bombardment of views coming from the "antimemorandum parties", that have found allies from the argentinian president to the Equator president that says "you can delete your debt too". A 20 year old unemployed, hears that, not some hypothetical scenario in a blog, when there is no indication from the EU that this may happen and certainly not when you have Mr. Venizelos saying "we 've solved finally our debt problem".


  3. For the history, today there was a tv transmission with Mr. Roumeliotis,up to recently greek representantive in the IMF. Interesting points:

    1) Greece must demand to have banks recap done by EFSF directly and this is vital, for 2 reasons:
    a) Make the debt more sustainable, because now it is not and everybody knows it (except probably from Mr. Venizelos who for months pretends it is).
    b) Because some hypothesis have been made in the greek program which are doubtful. For example IMF claims that the debt will be sustainable if in 2014 Greece has growth rates 2-3% up to 2020, if we have primary budget surplus 4,5%-5% every year again up to 2020."These numbers have not occured in any country around the world". *

    - "If we show that we catch the targets that will be agreed now we will avoid the predetermined by some route towards the euro exit. Some want to use Greece for internal reasons as the black sheep in order to make an example out it for the others. There is a strategic isolation of Greece by some, for clearly political motives with as target the expulsion of Greece"

    * Why would the troika put targets never met anywhere in the world?

    * My bet is, a Grexit, will "accidentally" occur, before the german elections, not after, for "Greece not having met the targets". Panem et circenses for the people, with Greece in the role of circenses. This is why i hope that someone in Greece has a plan to do it on our timing, not on Mrs Merkel's timing. Besides, i don't want Greece to give Mrs Merkel the victory! Best time for Greece for a Grexit: October-February. For Mrs. Merkel: 1-3 months before her elections (the audience must have the fact still vivid enough to be enthusiastic enough to vote for her).I hope greek politicians will have the decency to at least do it the way we want it, not how Mrs Merkel would like it as spectacle for her electoral campaign.

    * I also expect that the bank recap won't be accepted to be done directly but the issue will be vaguely postponed for a future time.