Friday, August 30, 2013

Cosco Hits the News!

I have been wondering why it had gotten so quiet around the Cosco investment in Pireaus. Readers of this blog will know that I consider this investment as a prototype of what foreign investment can contribute to the Greek economy (I remember reading that, according to projections, Cosco is expected to contribute about 2-3% to Greece's GDP).

Well, Cosco is back in the news again. According to this article in the Ekathimerini, there seems to have been a bit of a snag between Cosco and the Greek government. That snag now having been removed, the lights are on 'green' as regards a 224 MEUR investment into a new pier.

Offshore Companies, EU-Grants, etc.

Even though I have no evidence to back it up, I will make the following intuitive argument: if Greece managed to clean up the activities behind anonymous offshore companies and EU-grants, a very large part of the country's corruption, tax-cheating, etc. would be taken care of.

And the beauty of it is --- IT WOULD BE SO EASY TO DO THAT!!!

The EU Commission maintains a data base which records EVERY disbursement of an EU-grant: the amount of the grant; its purpose and its recipient. With so many well-educated young Greeks being unemployed, it should be easy to train a few hundred of them in the auditing of EU-grants. The simple question to check would be: were the monies disbursed used for the purpose stated in the application? This link leads to the various EU data bases registering recipients of EU-grants: EU grant recipient and contractors

Offshore companies
There is only one reason to have an anonymous offshore company: to do something which one doesn't want anyone in Greece to know. Theoretically, a wealthy Greek, out of personal modesty, might want to hide the fact is he donating a lot of money to cancer research. In practice, wealthy nationals normally want to hide other things.

If not already in place, the first step would be to require registration of all anonymous offshore companies before they can transact business in Greece.

The next step would be to identify the beneficial owners of those anonymous offshore companies. That, of course, can only be accomplished if there is cooperation from these owners. If they refuse, there is nothing one can do about it. However, one can make such refusals punitively expensive.

The best instrument is punitive taxes if anonymous offshore companies refuse to reveal their beneficial owners. For example: one could implement punitive taxes fall all payments made to such companies or on all properties which they own in Greece (with the threat of expropriation).

One could require anonymous offshore companies to have a bank account in Greece if they want to transact business in Greece. That would automatically take care of the problem because EU-regulations require all banks to know the beneficial owners of their anonymous corporate customers (actually, I would be interested if Greek banks comply with these EU-regulations).

To be sure: there is absolutely nothing illegal about having anonymous offshore companies. The problem begins when anonymous offshore companies engage in illegal business practices like corruption, tax evasion and so forth.

My understanding is that there are about 21.000 anonymous offshore companies transacting business in Greece. That is a manageable number. I don't know the number of annual disbursements of EU-grants but I would guess that that, too, is a manageable number.

What is keeping the government (perhaps with the help of the EU Task Force) from pursuing these issues with full force? It can only be a lack of political will.

Could more forceful popular will perhaps influence the political will?

Tuesday, August 27, 2013

Two Interesting Pieces for German-Speakers/Readers

Below are two interesting pieces for German-speakers/readers:

Bernd Lucke vs. Ralph Brinkhaus: Hold on to the Euro or not?
A most interesting debate lasting about 1 hour. Lucke is an Economics professor and the founder of the new German party AfD. Brinkhaus is allegedly a CDU-spokesman for financial matters.

My guess is that if Greeks watched this debate, they would choose sides with Lucke and become allergic against Brinkhaus. This despite the fact that Lucke is actually arguing in favor of a Grexit whereas Brinkhaus preaches the gospel of 'helping Greece'.

Lucke's proposal is to offer Greece what I would call 'a friendly divorce with a sizeable alimony', the alimony being a very major debt forgiveness. His principal point is that this would be the best solution for the Greek economy: a devalued Drachma would make the economy more competitive pricewise; there would be a far quicker recovery than with the Euro; the government would regain financial sovereignty in local currency; etc.

Brinkhaus comes across as the typical German 'Oberlehrer' who doesn't need to ask Greeks to know what is good for them. He speaks in terms of 'we', whereby it is unclear whether by 'we' he means the Greeks, the Europeans or perhaps even the Germans. "We have to get more reforms implemented"; "We have to improve the taxation system"; etc. He seems to feel that when 'we' are done with Greece then Greece will be a lot like Germany. A bald head and a precocious demeanor support the overall impression.

Diary of a German summer resident in Greece
A humorous (and in my opinion quite apt) story about personal experiences in today's Greece. Two observations which I really liked:

"The Germans work 7 out of 12 months of the year for the state, which for Greeks is an absurd idea. Greeks are hard-working all the way to exhaustion when they can enjoy the fruits of their labor. The state is an abstract enemy. I have to admit: I have sympathy for the Greeks' distanced relationship with their state".

"The decisions by the EU mean essentially the following: "Effective immediately, Greeks will behave like the Swedes did when in crisis". However, I can assure you: even after 3 years of crisis, there is not the slightest sign that Greeks no longer behave like Greeks".

Friday, August 23, 2013

Greece's Current Account: January-June 2013

These numbers come from the Bank of Greece (in EUR millions):


2012 2013
in %
Revenue from abroad

Exports 10.399 11.066

Services (e. g. tourism) 11.495 10.902

Other income 1.587 1.619

Current transfers 3.581 3.780

-------- --------

Total revenue from abroad 27.062 27.366

Expenses abroad

Imports 21.475 19.333

Services (e. g. tourism) 6.512 5.402

Other expense (e. g. interest) 3.943 3.660

Current transfers 2.043 1.854

-------- --------

Total expenses abroad 33.973 30.249

Net foreign deficit (current account) -6.911 -2.883

A reduction of 58% in the current account deficit is, on the surface, a phenomenal improvement. 'On the surface' because - as I have pointed out on several occasions before - the improvement comes primarily, if not almost exclusively on the expense side and not on the revenue side. Fixing a financial problem only through the expense side generally does not work very well. 

Yes, exports have again increased over the previous year, and the year 2011 had been quite good, too. But exports are still not very much over the level of 2008. With so much EUR-devaluation against third currencies since then and with so much internal devaluation one would expect much better results.

In 2008, total expenses were 101 BEUR. So far this year, they are running at an annual rate of 60 BEUR. That is an enormous improvement! Most of the improvement came on the import side which would principally be excellent if it meant that less money is 'wasted' on imports and more domestic production is generated. That was not the case in Greece. Instead, the import collapse came as a result of collapsing domestic demand.

So where is the good news?

The good news is that the terrible current account deficits of the 2000's have been brought under control. 2013 will in all likelihood be the first year in a long time where Greece will have a surplus in the primary current account (i. e. before interest). That is an enormous plus.

The bad news is that the price for these good news had to be unemployment. This unemployment will turn into permanent unemployment if there is no increase in domestic economic value creation. 

Greece is now in the curious situation where a good thing per se (i. e. current account under control) may very well turn out to be a bad thing for the economy. A balanced current account means that there are no net capital imports. But Greece will have to be a net importer of capital - hopefully in the form of foreign investment - in order to finance the necessary growth.

A current account deficit is not bad per se; it all depends what caused the deficit. During the 2000's, much of Greece's horrendous current account deficits was caused by excessive imports of consumption goods. If a future current account deficit were to be caused primarily by the importation of machinery & equipment for new domestic manufacturing, that would indeed be a good thing for the Greek economy.

Tuesday, August 20, 2013

Leaving Austria and Returning to Greece

On the eve of our return to Greece, I am reflecting on the experiences I have had in Austria in the last 2-1/2 months.

Off the bat, if there is indeed a Eurozone crisis somewhere out there, it has not yet entered the minds and hearts of everyday Austrians. If there are debates elsewhere about how the Eurozone could survive, they certainly haven't crossed the border to Austria. Those who have an opinion about the Eurozone crisis consider it as a self-contained problem of 'those countries in the South' and they generally feel that 'we shouldn't send any more money there'. An Economics professor from Vienna asked in an interview 'why should we care about the Greeks?' and if there was any reaction to that comment, it escaped my attention.

Austria has nationalized 3 second-tier banks in the last few years, all banks which no one would miss if they no longer existed today. Resolving those banks would have resulted in a significant structural improvement in the Austrian banking sector (overbanked!). But that would have required tough political decisions. When all is said and done, the cost to Austrian tax payers will be somewhere between 15-20 BEUR (compared with an annual budget of about 75 BEUR). The South should hope that the banking union gets delayed because, otherwise, they may have to finance part of that damage. And what does the Austrian tax payer say to that? Not much. 'Happy is he who forgets', says an Austrian operetta.

The second largest city (Linz) is in a battle with a Viennese bank (owned by NY financiers) over 500 MEUR losses stemming from a derivative deal which had gone sour. And the reaction of the Finance Minister? 'The tax payers will have to pay either way. Either by bailing out the city or by bailing out the bank'. Now that is what I call pragmatic!

The state of Salzburg was not quite as reckless. Their losses from derivative speculations were only about 400 MEUR. The interesting thing is that no one has yet figured out where those losses show up (or will show up in the future). My guess? Tax payers, of course.

A national election is coming up. One week after the German election. Quite possibly, Austrians will wait to see how the Germans voted and then vote the same way. The Austrian equivalent of ND/PASOK is ÖVP/SPÖ. Every Austrian government since 1945 has included one of these two parties and much, if not most of the time they both ruled together in a Grand Coalition. Despite all that, the Social Democrats are campaigning for 'more social justice' and the Conservatives are campaigning for 'more free enterprise'. As though neither of them had ever been in government.

The election campaign is literally boring. How could it be otherwise? There will be the same Grand Coalition after the election as there was/is before. The only open question is whether the Chancellor will be a 'Black' or a 'Red'. Whichever way it turns out, it won't make all that much difference because both parties have learned over the decades that it is much smarter to work together at the expense of the country instead of competing with each other for the benefit of the country.

What are the big news? Well, there are at least half a dozen of major political scandals which are keeping the courts busy. The issues involved are mind-boggling cases of corruption, bribery, theft, etc. But since both parties have their fair share of the scandals, neither of them has a keen interest in getting to the bottom of all of this.

The teachers' union has attended 33 rounds of negotiations with the government so far. At issue is, among others, the extension of working hours from 20 to 22 hours per week. Both, ÖVP/SPÖ finally plucked up their courage and announced that they planned to go ahead with the new law even without the union's consent. The unions are warning that a Civil War could break out...

It's going to be hard for Greece to top the experiences which I had in Austria in the last 2-1/2 months but I have all the confidence that Greece will...

"We should save Europe, not the Euro!"

This is a most remarkable interview with Kai A. Konrad! Remarkable for two reasons: (1) the person who is being interviewed and (2) what he says publicly!

Mr. Konrad (whom I have never heard of before) is being called a 'Senior Advisor to Finance Minister Schäuble' by the newspaper. He is a Director of the highly renowned Max-Planck-Institut as well as the head of something called the 'Scientific Counsel to the Finance Ministry'. In short, he is not just anybody.

This is the first time that anyone close the Germany's officialdom breaks the taboo of not ever calling into question whether the present Euro-structure can be maintained. In fact, his line of argument is quite similar to that of the very provocative Hans-Olaf Henkel in his latest book "The Euro-Liars" and which I have written about here and here.

Mr. Konrad has given up the belief that the Euro-structure can/will continue in its present form. Thus, he feels certain that there will be a full and/or partial break-up in one form or another. His suggestion is that the periphery countries should get together and pressure Germany & Co. to leave the Euro.

I get the clear sense that a defeatist attitude about the Euro-structure in its present form is gathering steam!

Friday, August 16, 2013

An Example from Estonia

Caveat - I am not familiar with the economic situation in Estonia. I am certainly not writing this to argue that Estonia is a role model of an economy. In fact, I couldn't even tell.

Instead, I am writing this to argue that ANY society (or part of it), be they Estonians, Greeks or whatever, can accomplish great things if they only put their minds to it. This article suggests that Estonia has become a leader in technology. I don't know how much that 'technology' contributes to Estonia's GDP. Perhaps a lot; perhaps only little. That's no my point.

Instead, my point is that here seems to be a society which, 20 years ago, embarked on a new direction where they seemed to have competitive advantages and where they spotted potential. Once such a process starts and once one discovers that one, indeed, has potential, the process begins feeding upon itself. Nothing feeds upon itself as success does.

Obviously, if someone - like the government - sets the direction, things become a lot easier. But much more than setting the direction and possibly implementing some support structures the government can't do. The rest is up to the people involved. They have to generate enthusiasm and a sense of common purpose.

I take it that the young generation of Greeks is very well educated. Personally, I am always amazed how many people (not only young!) I meet in all walks of life in Greece who speak English very well. Sometimes I ask them whether they have lived in an English-speaking country and the answer is generally 'no'.

A young generation, however well educated, will have to wait a very, very long time until a country like Greece recovers enough to provide them with new jobs in traditional functions. It is quite apt to talk about a lost generation.

But what if someone came along with ideas how these talents could be used for something new? Something which Greece has not done before? Any raw material needs to be refined in order to assume value. For a society, the educated young generation is one of the most important raw materials.

Steve Jobs allegedly once explained why he opposed market surveys in the following way: "How can I survey consumers' preference for something which does not exist yet?" If Jobs had not come up with his ideas, thousands of people might today not have the career, income and living standard which they enjoy.

I simply refuse to believe that Greece would have a lesser share of creative, entrepreneurial people than other societies. They, too, are raw material which needs to be refined. They must be motivated to step forward.

It is really a shame that the Greek government focuses so much on hard facts (debt, budget, etc.) and so little on soft facts (motivation, visions, etc.). Focusing on hard facts generally falls into the category of 'administration'. Focusing on soft facts generally falls into the category of 'leadership'.

Monday, August 12, 2013

Unanswered Questions

I read that Greek unemployment has increased once again. At the same time, I read that Greek tourism, a very major part of the total economy, is having a record season this year. I am puzzled how that can be.

Today, I joined my wife shopping at our local Aldi-store ('Hofer' in Austria). For the first time I noticed that, in the fruit/produce department, they show the country of origin for each product. I was amazed at the 'internationality' of the fresh fruit/produce on offer: Hungary, Holland, Turkey, Spain, Italy, South Africa, Peru - and so forth. There was no fresh fruit/produce from Greece.

I found a few Greek products in the section with canned foods (octopus, etc.). Produced by a company in the Industrial Park of Kilkis. I had visited that Park not too long ago and thought it was an industrial cemetary. Now I know that there is at least one producing company there.

It beats me, though, why there wasn't any Greek fruit/produce. When we live in Greece, I essentially live on Greek fruit/produce from the Laikí. There is no way that one can get the same flavor when one makes the same salads with the same products purchased in Austria.

Why in the world wouldn't Austrian supermarket shelves be full with Greek fruit/produce?

Sunday, August 11, 2013

Simple Solutions for the Eurozone?

Here are two very interesting papers:

The Systemic Crisis of the Euro - True Causes and Effective Therapies; by Heiner Flassbeck and Costas Lapavitsas
Cross of Euros; by Keven H. O'Rourke and Alan M. Taylor

Since I am not an economist and certainly not a monetarist, and since my brain is getting older with every passing day, I cannot profess to have understood every detail of these papers. But I think I got the gist of both of them (and, in fact, I think their positions are relatively similar).

What I liked the best was the absence of extensive discussions about debt and debt restructurings. I have always argued that the debt is the 'derivative' and that one can't solve the problem of the 'underlying' by playing around with the derivative.

To me, the underlying is the macro-economic imbalances within the Eurozone. In short, structural and chronic current account surpluses/deficits which lead to net cross-border capital flows beyond control.

I was positively surprised that Flassbeck/Lapavitsas argued that neither a political nor a fiscal union would be a realistic option to pursue. I agree. Those would be pipe dreams as of now.

Both papers discuss possiblities for re-balancing the imbalances. Sounds simple, but I did not have the impression that either paper had a simple solution.

O'Rourke/Taylor seem to be very, very pessimistic (or realistic?) about the future of the Eurozone.

Thursday, August 8, 2013

Different Currencies for Different Cultures?

I have recently made the comment that 'a currency cannot be imposed on a country; it must fit the country's culture'. That generated quite a bit of criticism. It is stupid, some people felt, because it makes absolutely no sense. Well, it certainly doesn't make sense if one is not prepared to think what may be behind that argument.

The NYT commentator Roger Cohen wrote a beautiful piece about what I meant. Yes, there is a difference between a culture driven by the Reformation, the Protestant Ethic, the Enlightenment, etc. and a culture driven by other things. One could, of course, argue whether the Euro helps to bring these cultures together or whether it splits them. Roger Cohen seems to think that the Euro could unite different cultures. Evidence todate would suggest that it splits them.

Ralf Dahrendorf said in 1995 (!) that "The common currency project drills the countries to German behavior, but not all countries want to behave like Germans do. For Italy, periodic devaluations are much more useful than a fixed exchange rate and for France, higher government expenditures are more meaningful than a rigid adherence to stability criteria (which are, above all, an advantage for Germany). Yes, France and Italy go along with German demands if for no other reason than national pride. However, the price for that is very high and it could soon become apparent that it is too high - psychologically, politically and economically".

That's another good example of what I meant.

Saturday, August 3, 2013

Seeing the erred ways of my thinking... (11a)

My recent admission that I erred when thinking that the Euro in its present form could survive in the longer term earned me a lot of criticism. Above all in the blog comments of Prof. Varoufakis who was kind enough to give my article wide distribution. This is why I want to clarify some points which were/are behind my reasoning (and it’s going to be a long clarification…).

1. The headline of my article quoted Lord Dahrendorf as saying, back in 1995, that "The idea of a common currency union is a big mistake, an adventurous, reckless and mistaken goal which will not unite Europe but, instead, divide it". I had linked Dahrendorf’s original statement in my article. I could also have linked the Delors Report of 1995 which, essentially, said the same thing. Sadly, Dahrendorf’s quote (and its timing!) was ignored by my critics and what incited their criticism was my reference to the book "The Euro Liars” and, particularly, to the author of that book.

2. The author’s conclusion was that the solution to the Eurozone would be a split into a North-Euro and a South-Euro. I had not subscribed to that solution. If anything, I would have my doubts that the problems of one common currency could be solved by creating two common currencies. However, I had totally subscribed to the author’s diagnosis.

3. That diagnosis (and the essence of the book; thus it’s title) was that there has been consistent lying since the outbreak of the crisis. Lying mostly on the part of EU-politicians but also on the part of national governments. We normally digest the news of a year in portions of 1/365th. By mid-year, we have forgotten what was said at the beginning of the year. When one gets 3 years in a condensed version of a couple of hundred pages, then one really gets worried because one really becomes aware of all the lying which has taken place. At least, that's what happened to me. I really didn't learn anything new from the book. However, it became clear to me that when liars run the show, the show won't have a good ending. Now, ‘lying‘ is an offensive term. More polite people would call it ‘denial’.

4. Do I think that the Euro was doomed from the beginning? Not necessarily, but it would have required the management of macro-economic trends within the Eurozone. Maastricht alone was not enough because it only addressed national budgets. What matters much more than national budgets (even though they may be a consequence of them) are national macro-economic trends. To manage those would not have required a United States of Europe but it would have required EU-institutions and, above all, EU-politicians who paid attention to macro-economic trends and who would act in consequence.

5. The most important indicators of cross-border macro-economic trends are national current account balances because they drive net cross-border capital flows. Or, one could say that net cross-border capital flows drive national current account balances. This is a chicken-and-egg process. It is an irrefutable mathematical fact, however, that in a world of local currencies, there can be no net cross-border flows of foreign currency capital if there are not current account surpluses/deficits. In the world of the Euro that’s quite different because the foreign currency (i. e. the Euro) also acts as the local currency.

6. Current account surpluses/deficits can be good or bad; that depends on the situation. However, excessive and chronic current account imbalances are bad; regardless whether they are positive or negative. When they are positive, it is not so easy to understand that because one is led to believe that the role of an “export world champion” is a virtue whereas the role of an “import world champion” is evidence of profligation. In financial terms, both have the same consequences.

7. Current account surplusers are (and have to be) net exporters of capital and current account deficiters are (and have to be) net importers of capital.

8. There were net cross-border foreign currency capital flows before the Euro. However, in a world of local currencies, there were brakes on them, the most significant of which was that one might run out of foreign currency capital (because foreigners were no longer willing to transfer foreign currency capital and/or made it too expensive).

9. The real kick-off to the misery was actually EU-membership. Two of the four “EU-freedoms” were the free movement of products/services and capital. Still, these two freedoms did not cause undue damage prior to the Euro because of the brake I described above.

10. The Euro did away with that brake. By intention? No, by default instead. Theoretically, the no bail-out clause should have cautioned capital to flow excessively to weaker economies. But financial risk is not an objective criterion. It is very much in the eyes of the beholder. And those beholders were the owners of capital.

11. Capital always flows to areas where its beholders assess the risk-adjusted return to be the highest. The owners of capital assessed the risk of Greece & Co. more or less the same as the risk of Germany & Co. This was not the case prior to the Euro because Greece, for example, had to pay 5-7% more on foreign currency loans than, for example, Germany.

12. In consequence, capital (much of it German and French capital) flowed to the South and the "5-7%" eventually became less than 1%. Political leaders at the time praised this on the grounds that “convergence” was evidence that the Euro was very successful. And in the South, it facilitated excessive current account deficits.

13. Thus, what used to be a ‘brake’ became a ‘gas pedal’. Banking regulations accelerated the process because Basel-2 classified sovereign debt of EZ-countries as ‘risk-free’, thereby not requiring equity to support sovereign loans. Deutsche Bank today has about 5 times as many ‘risk-free’ as it has ‘risk-weighted’ assets. In the absence of leverage controls on banks, banks went overboard with lending to ‘risk-free’ borrowers (because it often tended to be more profitable than lending to ‘risk-weighted’ borrowers).

14. Maastricht would have contained this a bit if it had been adhered to (i. e. if Germany and France had not been the first two countries to violate it). But Maastricht could not have contained the net cross-border capital flows into national private sectors. Spain and Ireland did not get into trouble because of government profligation. They got into trouble because they wanted (or were forced) to bail-out their over-indebted private sectors.

15. Thus, the two critical macro-economic indicators which should have been regulated as much as Maastricht regulated the budgets were the current accounts and the net cross-border capital flows. One could have said, for example, that current account deficits must be limited to 3% of GDP and net foreign debt to something like 100% of GDP. I don’t know how one could have enforced that in a framework of free movement of products/services and capital (should the Spanish government have prohibited foreign loans to their private sector?), but without it, we got the results which we have today.

16. Would the same results have happened without the Euro? It cannot be ruled out. After all, capital had ‘gone crazy’ (the local currency country Iceland was viewed as the new Wall Street of the North Atlantic; the local currency country of Hungary ended up financing 80% of housing loans in CHF). But I would argue that, without the Euro, common sense would have surfaced sooner. And it certainly would have surfaced sooner if banks had been limited in their leverage.

17. All of this, as bad it sounds, would still not have needed to end up in the situation where we are today. That, however, would have required EZ-leaders, back in 2010, to recognize the problem instead of lying about it. Or rather: instead of denying it.

18. If the problem began with exuberant net capital flows into the wrong direction and the resulting current account imbalances, one would have had to reverse these processes. One would have had to strengthen the weaker economies through investments (even if that meant less investments in the stronger economies) and to put them into a situation where they, out of their own efforts, could reverse these macro-economic trends (obviously, the weaker economies would have had to be prepared to do that).

19. However, if one reduces the problem to the phrase that “If Greece fails, the Euro fails and if the Euro fails, the EU will fail”, one is off on the wrong track. The proper phrase would have been “If Greece fails, many of our banks will fail but we will deal with that separately. Our first priority is to re-establish macro-economic balances in the economies of the Eurozone”. And one lie (pardon me: I should have said ‘denial') led to innumerable more. That’s what the book which I referenced pointed out.

20. The Euro (or any other currency) is not an end in and by itself. It is a means towards something. The end should have been defined as increasing the living standards, on a balanced basis, of the people living in the Eurozone. Instead, the end was defined (on purpose or not) as meaning that "The common currency project should drill the countries to German behavior" (Dahrendorf); or that the common currency would, by force, lead to a United States of Europe. Such ends can never be accomplished by mandate.

21. I don’t remember whether it was 2010 or 2011, but a rumor had erupted that Jean-Claude Juncker had called for an emergency meeting with the Greek Finance Minister Papakonstantinou. Juncker vehemently denied that. Unfortunately, he was subsequently filmed on his way to the meeting. He justified that afterwards (I still remember that interview) that "when things get serious, one has to lie”. That is not uncommon in politics but what is inexcusable is that one publicly says so. After all, there is an invaluable good called ‘the confidence of people in government’. If one willingly destroys that good, one is responsible for the consequences. This and similar incidences had prompted me to write an article, back in November of 2011, titled “A Nueremberg Trial for EU-Elites”.

22. As far as I can tell, there are no significant animosities between the people of Iceland and the rest of Europe today. Yes, a lot of banks lost a lot of money in Iceland and the Icelanders had a very rough time for a while. However, would Iceland have been able to choose the course it had chosen if it had had the Euro as its currency? Or would the 300.000 or so Icelanders today be liable for the foreign debt run up by a few mad bankers?

23. I would agree with Uwe Bott when he says that “In theory the flaws in the construct are fixable, in reality there is not enough time or political will”. Yes, the problem could still be fixed but no, there are, in my opinion, exactly zero indications that there is the political will on any of the sides involved.  That would require responsible politicians to recognize reality; admit mistakes; and go from there. That preparedness is not recognizable as far as I am concerned and this is why I had a change of mind, after extensive pondering, regarding the future of the Eurozone as it is.

24. I principally don’t expect the Eurozone to fall apart any time soon. Instead, I expect a continuation of the process of ‘muddling through’. Such a process can go on for quite some time unless it is interrupted by unforeseen events. The most dangerous unforeseen event is civil unrest in one of the countries concerned.

25. In my first year at an American college back in 1968, economics professors explained to us why, from an economic standpoint, the economy of the Soviet Union was doomed. Still, it lasted for another 22 years (and it might have lasted even longer if there hadn’t been Gorbachow). However, the point is: the longer an artificial system is maintained, the faster it will collapse once it collapses.

In summary, my ‘admission of defeat’ was not an expression that there could absolutely be no solution for the Eurozone as it is. Instead, it was based on my assessment that, after observing the situation for 3 years now (and after reading a condensed summary of all the lies which have been broadcast so far), there are no indications whatsoever that there can be a ‘European Initiative’ which Prof. Galbraith referred to. Nor a Modest Proposal. And without an initiative of that (or similar) type, there is no hope in the longer term.

PS: previous posts in this series: P1, P2, P3, P4, P5, P6, P7, P8, P9, 10, 11.

Thursday, August 1, 2013

Seeing the erred ways of my thinking... (11)

"The idea of a common currency union is a big mistake, an adventurous, reckless and mistaken goal which will not unite Europe but, instead, divide it"
Lord Dahrendorf, 1995.

Since I started this blog, I have tried to be as self-critical as possible; taking differing views into account; pondering them; learning from them; incorporating them into my own views. This is my 11th effort to recognize the erred ways of my thinking - and it is a major one!

To make it short: I now believe that Lord Dahrendorf was right. Right not only then but, even more so, today.

My blog has focused on Greece; I have more or less ignored the situation in other countries of the periphery (and I have not paid enough attention to the German situation). Greece alone had made me optimistic. I had observed, on location, how a small economy which had totally collapsed could be successfully turned around in only a few years with the right domestic economic leadership and the right support from abroad (Chile in the late 1970s/early 1980s). And I thought the same could happen easily in Greece. Well, it's not happening in Greece because the country does not have the right economic and political leadership nor the right support from abroad.

I had started wavering in my position some time last year but I forced myself to remain optimistic. What has brought me down to reality?

There seems to have been an intensified discussion of late about solutions to the Eurozone (at least in the media and blogs which I follow). I particularly refer to two articles in Prof. Varoufakis' blog: Six Critical Responses to the Modest Proposal and James Galbraith on Europe (and the numerous comments to them). Those pieces were indeed thought-provoking!

However, the eye opener was the book "The Euro-Liars" by Hans-Olaf Henkel which I have just read. Henkel is a very provocative individual but one can discard his provocations. However, one should not discard his arguments!

Henkel's principal - and irrefutable - argument is, like Lord Dahrendorf said almost 20 years earlier, that the Euro does not unite Europe but, instead, it splits it. There is massive evidence today that this is so. In my view, it is of secondary importance to analyze who is to blame for that because that always leads to endless loop-discussions without results. It is far better to recognize reality. And, secondly, Henkel argues that the Euro not only limits (if not destroys) economic potential in the South but also in the North.

It is futile, Henkel says, to impose a currency which doesn't fit national cultures. Instead, national cultures have to shape their currency. The Euro, as it was designed, does not fit the cultures of countries like Greece, Portugal and Spain (Henkel also adds Italy and France!). Neither is today's Euro suitable for the North because it makes it too easy for Germany & Co. to export (much of the exports are courtesy tax payers because tax payers lend the funds so that the periphery can pay for imports from Germany & Co. Put differently, a massive export subsidy!). If Germany & Co. were not in the Euro, they would have to become even more innovative and productive to remain competitive in the world and their surpluses would most likely come down.

In his critique of Six Critical Responses to the Modest Proposal, the American Uwe Bott (Bott Consulting, NY; contributing editor to The Globalist) writes more bluntly: "There will be no resolution to this crisis until European policy-makers come to grips with fundamental economics. The Eurozone never was and less and less is an optimum currency area. In theory the flaws in the construct are fixable, in reality there is not enough time or political will. It is the inescapable consequence that the Eurozone must be dissolved. In applying the lessons of German unification onto the Eurozone, it becomes unmistakably clear that even a willing Germany could never pay the price to make monetary union in the Eurozone work. The price tag for such exercise would be exponentially greater than the cost of German unification. Moreover, the ability to freely migrate in order to mitigate some of these problems simply does not exist in the Eurozone given cultural and language barriers".

My original optimism about Greece was based on the following logic: a long-term economic development plan (at least for 10 years) would be necessary to build up domestic economic value creation (and/or repatriate it through import substitution); a shift of the necessary foreign funding from loans to direct investment by foreign private sectors in the Greek private sector; EU-incentives to facilitate that (such as guarantees for the political risk including a Grexit); possibly temporary 'infant industry protection' (incentivating the repatriation of monies held by Greeks abroad and/or limitations on capital outflows). This is not happening (and I no longer have the hope that it will happen) because the EU never thought in those terms and Greek leadership never showed the will or, more importantly, the capability to effect the necessary reforms.

As Prof. Galbraith argues, austerity alone is not the solution; neither is stimulus alone the solution. It would require a 'European Initiative' comparable to what the US government might do in a similar situation. A United States of Europe with a federal government? Who would elect that government? Would national governments appoint it or would voters Europe-wide elect it? A Finn campaigning for election in Greece? A Greek in Germany? 

The present EU as a role model for a future federal government? An EU which currently seems more outside of Europe than part of it? An EU which tells us which shape cucumbers must have; what kind of light bulbs we can buy; what kind of bathroom fixtures? Since I have about 10.000 qm of grass to take care of, I am particularly interested in the latest EU regulation which will tell me what type of machinery I can use during which hours of the day/week!

In short, an EU of self-possessed overpaid winetasters who regulate what must be done at the subsidiary level but who do not have one phone number which the US President could call on defense or foreign policy matters? If that is the price to pay for the Euro, the price is far to high! Europe is not a uniform continent. On the contrary, one of Europe's USPs is its diversity of nations, cultures, languages, mentalities, etc. etc.

But something similar to the above seems necessary if the Euro is meant to survive in its present form. Some people argue that Germany should assume more 'continental leadership'. That, however, ignores how many Europeans would be scared by that (most of all the Germans themselves). 

Dissolving the Euro in its present form would cause very significant financial losses to all. True, but are those losses which could be avoided or are those losses which are already there but not yet realized? 

The South has already paid much of its bill: unemployment; economic destruction; absence of future perspectives; etc. One could argue that it can't get much worse and that a departure from the Euro in its present form would actually be beneficial: the South would become more 'competitive' in financial terms and it could draw on the capital which it has sent offshore during the crisis. 

The North has, as yet, hardly paid any part of its bill. However, responsible accountants would have to book that bill as an 'account payable' and it is just a question of time when it will have to be paid.

So it comes down to operational questions: Who will pay for what part of the bill? What is the best mechanism for facilitating an orderly payment of the bill? Etc. One ought to be able to expect that a group of smart people would find a solution to that, if the EU were only willing to form such a group and give it a mandate.

Henkel makes an important point: it is not the deficit countries which should exit the Euro. That would be adding insult to injury. Instead, it is the surplus countries which should do that! There are various ways how this could be approached. Henkel proposes that Greece, Italy, Spain, Portugal and France should keep the Euro as it is (with France assuming leadership) and that the other countries should chose a new currency for themselves (Henkel proposes a North-Euro and a South-Euro). Some countries (Bulgaria, Romania, etc.) might want to join the South-Euro and other countries (CZ, Poland, Denmark, etc.) might want to join the North-Euro. Another alternative might be to introduce parallel national currencies. As I said, there are many alternatives (Merkel's 'no-alternative-position' is an inconsistency in and by itself).

I sympathize with Greeks & Co. going on the barricades for having been deprived of a future. I also sympathize with Germans & Co. who feel that they have been (and are being) taken for a ride. Is that because of the Greeks & Co. and the Germans & Co.? I severely doubt it! Before the Euro, the Greeks & Co. and the Germans & Co. had a rather good time together. It is the Euro which has put the people of the Eurozone against each other.

So, I admit defeat in my belief that 'European policy-makers would come to grips with fundamental economics'. They seem incapable of that. All those ideas which aim at solving the Eurozone's problems through generating aggregate demand or through a Modest Proposal (which otherwise sounds very interesting) are pipe dreams. They might work in the United States of America with a strong federal government but they are pipe dreams in a Europe of administrators, technicians and bureaucrats focusing on national interests, all speaking in different languages and different directions.

RIP Eurozone!

PS: previous posts in this series: P1, P2, P3, P4, P5, P6, P7, P8, P9, 10.