Saturday, August 11, 2012

Freedoms of product/capital flows are not always fair for everyone!

Two of the four EU-freedoms are the freedoms of product and capital flows. Wonderful freedoms! Are they freedoms which serve the principles of fairness in an economy?

Is it understood that whenever some Greeks import SUVs, what happens in reality is that the foreign debt of ALL Greeks is increased for the benefit of those who can afford to import SUVs?

Is it understood that whenever some Greeks withdraw their savings from banks (either to hoard them under pillows or to transfer them abroad), the foreign debt of ALL Greeks is increased for the benefit of those who have savings?

The Greek economy depends to a large extent on funds flows from abroad. The trick is: funds flows from abroad come to Greece either via the state as a borrower or via banks as borrowers. When the state is the borrower, it is clear that ALL Greeks are liable for that debt. When banks are the borrowers, it is de facto clear that - if worse comes to worst - ALL Greeks will be liable for their debt.

Wouldn't it be the most natural thing to take measures that those policies which serve the interests of some members of society (at a cost to ALL members of society) are reigned in?

The answer to that would be import restrictions (such as special taxes on certain imports) and capital controls. Wow, I can already hear the uproar from free trade enthusiasts that this would be a return to the stone age of commerce! I can hear how that would be a violation of EU-treaties! Actually, I am a free trade enthusiast at heart and, actually, I am a believer in the observance of treaties.

It wouldn't be a return to the stone age of commerce! I would simply simulate the situation which Greece was in before the EU-freedoms and before the Euro. Everything which was imported then was taxed so high that those who could afford to import were making their fair-share contribution to society via taxes.

Am I recommending a return to no-free-trade-policies? No way! But I AM recommending some breathing space. Breathing space for an economy to regain its bearings.

There is simply no chance for an economy like that of Greece's to regain its own bearings when two killer-apps (freedom of products and capital flows) are eating away at the economy's substance! No economy in the world can survive if its production and its financial capital are withdrawn!

Ideally, free market forces would accomplish that. Greece would deflate so much that production and capital return. Well, I invite free market dreamers to think that way; it won't happen. Those who are really interested in free markets long-term (like I am), first have to create the conditions that free markets can work effectively for society as a whole!

One has to temporarily put the two killer-apps of the Euro-system on hold in the case of Greece!

Now, here is a conditio sine qua non if one were to pursue a policy as suggested above. It would have to be clear that those are only temporary measures to allow the Greek economy (via infant-industry-protection) to eventually reach its own competitive level. If that were not assured, it would indeed be a return to the stone age of commerce!


  1. There is also an alternative to restricting imports or imposing import tariffs, something practically very difficult and that is to turn the Greek economy from a consumption led one to a production. One way this can be done is to raise VAT on consumer goods exempting necessities such as food as well as anything related to the tourist industry and incentivize investments in industries where Greece has a clear comparative advantage. For example, agricultural produce, renewable energy, anything related to the shipping industry such as shipbuilding (where an attempt has recently been initiated), hospitality and tourist industry etc. where a highly expansionary tax incentive system should be set up which will not have any cost to the government and will attract foreign capital.

    These can be some easy solutions to reversing these killer apps.

    1. Whatever alternatives there may be --- I don't claim to know all of them. What counts is the objective, i. e. reversal - if only temporarily - of those killer-apps!

  2. @Robert G Danon - Greek VAT is 23% on Category 1 (non essential) goods and services - what rate would you suggest it be 30%. 40%, 70%. Did any country ever tax its way out of depression, did any country every borrow its way out of excessive debt.

    The killer app for Greece would be it own currency. If Greece is given dispensation to deviate from the rules, then why not Portugal, Ireland, Cyprus, Spain, Italy, why not EU members countries that have their currencies pegged to the Euro - some of which are in worse shape than Greece. I don't imagine France would stand idly by, it would want its slice of the pie.

    The Euro was a great idea, with a poor design and an even worse implementation. Perhaps it might have worked out if the EU Constitution had been implemented - but that was rejected - by the people of France and the Netherlands.

    I would not object to the measures you propose for Greece, if I believed they would a "For Greeks Only" solution, but surely you don't expect me to believe that.

    If the distressed states had control of their own finances then they could each devise measures to suit their own particular economy, culture, history and religion. That's what happened in Asia in the mid '90's, each distressed country worked through the crisis in its own way.

    Whilst ever the EMU exists in its current configuration the situation will worsen. The sooner the Eurolanders face up to that, the sooner it can get itself out of the mess it created for itself, and the sooner the rest of the planet can 'get on with life'. Already we see trade barriers going up in the America's - we know where trade barriers and trade disputes lead us - into wars, is that what we need - bloody good war.


    1. Even though this is not what I am suggesting, if necessary, I could defend a "for Greece only" solution.

      Greece is a very special case, I think. Countries like Spain and Ireland got into trouble because of what one could consider one-time-events --- bubbles in the private sector. Greece, on the other hand, has had structural problems since memory.

      The other day, I came a cross a video with Prof. Varoufakis from the year 1993. It in, he referred even then to the “terminal decline of the Greek economy which started in the 1970s” and even then he was already pessimistic about the chances of reversing it.

      We subsequently correponded by mail and he explained to my how, even back then, the Greek economy was a structural basket case. Probably the best exchange I have ever had with Prof. Varoufakis.

      So, Greece is much more, from an economic standpoint, like the former DDR than Spain or Ireland. A totally mis-structured economy which one could keep alive with transfer payments, or not. In the case of the former DDR, the Germans performed open-heart surgery. I am not sure that one can tell yet whether that surgery was successful.

      A very good friend of mine in Greece whose judgement I have come to value wrote me the following: “Greece will never change. Greece will return to the Drachma (he predicts) on Friday night, January 11, 2013. Then a re-emergence into sunlight in a 1960 format, i.e. cheap tourism and, hopefully, a streamlined agricultural system which could turn the current 40% domestic food deficit into covering all domestic needs - and provide some export activity”.

      If that's the vision for Greece and if that's what would make Greeks happy, go for it! Even if one had to support it a bit with transfer payments.

      Personally, I can't imagine that this is a vision which - longer term - would make Greeks happy. Perhaps the mature generation might be happy with it but not the younger, educated generation.

      Bottom-line: the general challenges of the Greek economy are the same as those of the other economies (lack of competitiveness) but in Greece you have "special situations" which go way beyond the day-to-day workings of the economy. That, I don't think, one finds in other countries, at least not to the extent as in Greece.

  3. I venture to suggest that the DDR was in better shape when the Wall came down than any of the Baltic states. And I question whether it was in worse shape than Poland, or Czechoslovakia. The DDR was in much better shape than Hungary, Bulgaria and Romania.

    This from a friend today, in response to my congratulations on Lithuania being 12th in the per capita Olympic medal tally.

    "... yes this is true, but there's another dangerous indicator in this. Our small country is dying, very fast, it is losing more and more people every year, many small towns are already abandoned... but our politicians do not see that something is wrong in their country. Maybe some day they will - but I am afraid it will be too late."

    Whilst its not in the Eurozone, its currency is pegged at 3.45280 litas to the Euro, it was due to join in 2010, but inflation took off after 2007, so it didn't. So if Greece, why not Lithuania.

    On Greece I think we agree "Greece is a special case". But my solution would be to free Greece from the burden of the EMU, of which it never should have been a member anyway. Forgive/reschedule its debt, make EIB loans available etc. In fact I would go further - I would unburden it of most of the EU strictures and put it in the European Customs Union, alongside Turkey.

    Trying to keep Greece as a full member of the Eurozone, whilst giving it dispensation to 'break the rules" is patently unfair on other countries. Such as your neighbours Slovenia and Slovakia, and of course the Baltic states who suffered under direct rule from Hitler followed by Stalin.