Ambrose Evans-Pritchard on France (and the FN)

"Their (the FN's) working assumption is that the Eurozone's North-South imbalances have already gone beyond the point of no return. Attempts to reverse this by deflation and wage cuts must entail mass unemployment and loss of the industrial core".

This article by Ambrose Evans-Pritchard is enlightening. He doesn't accept face value what MarineLe Pen is saying but he doesn't discredit her arguments either. If anything, he says that "the worst fears of the EU elites are starting to come true". I have made similar arguments in the below posts.

Giving up hope
Justifying the giving up of hope
Why hope is no longer justified

"I Don't Want to End Up With More Problems... But I still love Greece!"

Here is the story of an Italian investor who is running against Greek bureaucratic walls in connection with an investment he wants to make in Greece. The bottom line is:

He (the Italian investor) also concluded that “it is clearly a political matter not a legal one. I was in Halki to look for a house by the sea; there are quite a few on the seafront and also very elegant. However, all their terraces and steps to the water are illegal and I don’t want to end up with more problems. I will now check the Dalmatian Coast instead,” he said, though admitting: “I still love Greece.”

Cute last words, I can add to this...

Reading Up On Keynes...

A few weeks ago, I began doing something which I hadn’t done since my College days – I did some reading of writings of and about John Maynard Keynes. Among others, I am just finishing the book “The Battle of Bretton Woods” by Benn Steil. And I am amazed! Two principal issues dominated the negotiations lead by Keynes on the UK side and by Harry White on the US side, namely: the flow of trade and the flow of capital as a result of a new monetary system.

Now I, for one, had not heard much about the flow of trade and capital as the Eurozone evolved since inception. Instead, I seemed to always hear two principal themes: the convergence of interest rates and the external strength of the Euro. Since both developed very favorably, the Euro simply had to be considered as a success.

It was only after Lehman that I began looking more closely at the world-wide flow of trade and capital, albeit not within the Eurozone but, instead, between the US and the rest of the world. And I was overwhelmed by the enormous current account deficits which the US had been running for years and decades. It seemed that the obsessive and no-fear-of-debt-having American consumer had created jobs and wealth in the rest of the world and I started wondering how long that could go on.

Thus, when the Greek crisis began erupting in late 2009, the first thing I looked at were Greece’s Balance of Payments figures (particularly the Balance of Trade) since the Euro – and I couldn’t believe what I was seeing. Everyone seemed to be worried about Greece’s budget deficit and sovereign debt whereas in actual fact it was clear that the Greek economy was essentially driving itself out of its value-generating activities since the Euro. And none of the discussions focused on that problem. Instead, the logic shared by most everyone was that the budget would have to be gotten under control, reforms made and then everything else would automatically fall into place.

I am simply baffled how, prior to Bretton Woods, leaders would have understood that the issues are trade and capital flows and, since the Euro, no one paid attention to them. All the numbers showed the scary development since the Euro but no one seemed to deem them important.

The dogma for the EU and Eurozone were the 4 freedoms, including the free movement of trade and the free movement of capital. As long as that was assured, everything would be fine. And now I read that even Keynes was meandering on these issues: believing in the benefit of free trade and capital flows but questioning their ultimate success at the same time (I guess Keynes realized that Great Britain was not ready for completely free trade and capital movement).

In retrospect, I think that Greece, for one, simply was not ready for the free movement of trade and capital; certainly not after the introduction of the Euro. Furthermore, despite being a great believer in the workings of free market forces within an adequate policy framework, I am beginning to wonder whether the completely free movement of trade and capital is a workable proposition within the Eurozone in its present structure (which is why I recently gave up hope that the Eurozone could survive in its present structure).

The opposite to free movement of trade and capital is not necessarily the control of trade and capital. I, for one, believe that the Eurozone, in its present structure, needs a ‘managed flow’ of trade and capital whereby the ‘management’ takes the form of incentives. I remember reading, back in my College days, about the concept of ‘infant industry protection’. The idea is that one cannot expose an economy to world-wide competition if that economy is not yet ready to compete. In the case of Greece, I am not even sure that a return to the Drachma would change all that much. Ok, Greece would immediately become a lot cheaper (‘more competitive’) in foreign currency terms. But being cheap alone doesn’t automatically build up a productive capacity. That requires a long term economic development plan.

Regarding the alternative of a Grexit, I don’t see the operational challenge as unsurmountable at all. If handled well, a one-week bank holiday (at the most) should suffice for that. But I don’t believe that, in a redesign scenario, it is the weaker countries which should leave the Euro. It would be of greater benefit to the weaker countries if the stronger ones (Germany & Co.; i. e. the North) left the Eurozone. That would leave the South with a cheaper currency relative to the North. The South would not only become more ‘competitive’ pricewise but its Euro-denominated debt would devalue relative to a Northern currency.

That, however, is guessing. What is not guessing is the realization that the free flow of trade and capital, combined with a common currency, has deprived a country like Greece of its productive capabilities and until that issue is properly addressed, the losers of the Euro-structure can have little hope to ever utilize their economic potential.

How Not to Manage Foreign Debt Problems

What a relief to read that, back in 2010, there were board members of the IMF who obviously did have experience with countries going through external payments crises and who, therefore, criticized what the IMF and the Troika in general were doing. Not much of a surprise that the critics included board members from Latin America. After all, Latin America had arguably the most experience with national external payments crises and how to handle them.

Since I was personally involved in the external payments crises of Chile and Argentina during the 1980s, I could only marvel about the incompetence I saw displayed at the level of EU leadership beginning in 2010. It prompted me to write the cynical article How Not to Manage Foreign Debt Problems. And I got angry at the arrogance of EU leadership who not only failed to seek advice from those who did have competence but, to top it off, even rejected such advice when it was offered from people like Bill Rhodes & Co. That prompted me to write a most serious article A Nueremberg Trial for EU Elites.

Actually, the nature of an external payments crisis is so simple that a high school student would be able to understand it. All it means is that a country is running out of a currency which it needs but which it can't print. The issue is that is it the country in toto which is facing a sudden stop in the availability of the foreign currency. Put differently, the issue is the entire foreign debt of the country. Whatever happens within the country - be it the public sector, the budget deficit, the sovereign debt, etc. - is of secondary importance.

Now, what might a high school student answer if he is asked his opinion about lenders' attempts to get foreign currency back from a country which has run out of foreign currency and which has a negative foreign currency cash flow at the same time (i. e. current account deficit)? If he is polite, he might say that 'this is like attempting to draw water from a dried-out well'. If he is blunt, he might say that 'this is stupid'.

The Latin Americans could have told the Europeans that the first thing you do is to take the entire existing cross-border debt and reschedule it. The greater the crisis, the farther out the rescheduling of principal maturities (perhaps 25 years; perhaps 50 years; perhaps 99 years; perhaps Evergreen Bonds). And to ease the interest burden, one simply defers interest payments for some time and capitalizes interest (apart from the fact that one should not have fixed interest rates but, instead, rates which adjust to certain macro-economic variables; for example, one could set the interest expense at, say, 5% of total government expenses).

The reason why one reschedules the existing debt (instead of refinancing it) is to keep existing lenders on the hook. The Europeans had the good grace to volunteer their tax payers to pay off existing lenders (without even asking tax payers for approval). Deutsche, BNP & Co. must have opened champagne bottles at the time; the tax payers will sooner or later realize that they paid for the champagne (and much more!).

Terms like 'debt restructuring' or 'PSI' have been used as though they automatically involved a haircut. Well, 'debt restructuring' means that principal and interest maturities are restructured and 'PSI' means that the private sector remains involved (instead of being let off the hook). No more and no less. By misinterpreting these terms as automatically involving a haircut, one scares off everyone and jeopardizes a reasonable solution.

At December 31, 2010, the entire foreign debt of Greece was 404 BEUR (182 BEUR with Central Government and 222 BEUR with Financial Sector and Others). The holders of that debt would have had to be told that they will continue to hold that debt for quite some time to come. At least until such a time when Greece starts generating positive foreign currency cash flows and even then there would only be interest payments and no principal.

Why would the lenders have agreed to such a proposal? For the very simple reason that one cannot draw water from a dried-out well unless someone first dumps the water into it. And it should have been made crystal clear to every creditor that no tax payer can be expected to dump water into the well so that private lenders can take it out for their own benefit. Those creditors who might have refused to accept that would have been invited to make adequate risk provisions to their P+L, check their equity ratios afterwards and prepare to walk over to their governments to ask for a bail-out (and to do that with fitting humility lest the governments don't fire them on the spot).

Germany's Current Account Surpluses

Greece's current account deficit has been reduced significantly in the last 3 years. So have the current account deficits of other countries of the periphery. The reverse is not true for Germany: its current account suplus has not only remained firm; it has even increased in the last 3 years.

Many international commentators create the impression as though all Germans were ignorant of the downside of current account surpluses (when they are excessively high). Yes, the idea of being the "export champion of the world" seems to have taken roots as a virtue in general German thinking. But no, it is not correct that no one in Germany questions this idea.

Discussions among German economists, intellectuals, commentators, etc. about the country's enormous current account surpluses have been intensifying of late. Below are just 2 interesting articles:

Die Crux mit dem deutschen Leistungsbilanzüberschuss
Der Fluch des guten Geldes

The tenor is always the same: current account surpluses cause, as a mathematical consequence, capital exports. Germany is now the world's largest exporter of capital; the largest provider of international capital. That could have damaging consequences for the German economy at some point in the future.

I found particularly former Chancellor Helmut Schmidt's answer interesting when he was asked whether Germany should reduce its current account surplus. His answer:

"I believe that we really have to reduce our current account surplus. If we don't do it, others will do it for us and we may not like the way in which they will do that. Fourty years ago, there was a law in Germany which stressed the importance of maintaining a balance in the country's external accounts. Today, we are far away from such a balance."

Imports of Products - Exports of Jobs

Every time I walk through Greek supermarkets, shops, etc., I wonder whether Greek leadership understands the following formula:

Whenever Greece imports a product which could just as well be produced in Greece, it exports jobs. And where the jobs are, there are the wage/income taxes, social contributions and revenues for the state. The toothpaste which I buy in Greece is produced in Brazil and comes to Greece via a distributor in Hamburg. All of the product development/production jobs are in Brazil and most of the distribution jobs are in Germany. The same goes for the related wage/income taxes, social contributions and revenues for the state. Is there any reason why Greece needs to import toothpaste from Brazil? Or import it in the first place?

Why wouldn't Greek leadership continually hammer in this point in public speeches, writings, interviews, etc. until the advantages of "buying Greek" are clear to even the last Greek in the most remote village? The government could take a cue from John Maynard Keynes who said the following in a radio address to the British people in January 1931:

"Whenever you save five shillings, you put a man out of work for a day, whereas whenever you buy goods, you increase employment - though they must be British, home-produced goods if you are to increase employment in this country. Therefore, O patriotic housewives, sally out tomorrow early into the streets and to to the wonderful sales!"

Keynes presents the trade-off as one of saving versus spending. In today's Greek depression, I am not sure that this is the relevant trade-off because demand has very much declined because of lack of money, not because of undue saving. But Greek housewives (and consumers in general) are still spending money and as long as one spends money, however reduced the volume is, there is a trade-off, or rather a choice to be made: will the Euro be spent on a Greek product or on an imported one. Thus, one would have to adapt Keynes quote to today's Greece as follows:

"Whenever you spend 5 Euros on an imported product which is also produced domestically, you put a Greek out of work for a day. If you spend the money on Greek products, you increase employment in Greece and aggregate demand as well. Therefore, O patriotic Greek housewives (and consumers in general), sally out tomorrow early into the shops and buy only Greek products!"

I can't wait to hear such speeches!

1st Hellenic Innovation Forum - October 7-8, 2013 in Athens

This most interesting article from the Ekathimerini alerted me to the 1st Hellenic Innovation Forum which will take place in Athens from October 7-8.

If memory serves correctly, the EU had decided some time ago that all member countries should aim at spending 3% of GDP on R&D. Or rather: all member countries committed that they would spend 3% of GDP on R&D. It would be interesting to know which countries kept their promise.

Greece did not keep its promise. As the article says, Greece spends about 0,5% of its GDP on R&D, less than any other EU country (Sweden, interestingly, spends 3%!). The article states that

"A closer look at research and innovation activities in Greece reveals that some excellent basic research institutes and a few small but innovative companies do exist around the country. However, given the high regulatory burden and the unfriendly environment toward innovative companies, great innovations in basic research cannot spill over into new business in Greece. Instead, these ideas are used by business abroad".

"Of particular importance for Greece is the Teaming for Excellence program. The scheme will offer substantial funding on a competitive basis for projects aimed at developing cutting-edge research centers in less advanced EU regions. The proposals will be submitted by teams comprising an internationally recognized research institute – among those of the European elite – and people from the host region. The key objective is to provide a high-speed lift to excellence in research and innovation in countries such as Greece, allowing them to align high-quality science with technology-based entrepreneurship".

There will be a conference on Teaming for Excellence in Prague from October 17-18.

The article considers Greece’s major assets R&D centers its current research potential, its culture and living conditions, as well as its distinguished diaspora.

The article also references a paper titled "Growing out of the crisis: hidden assets to Greece's transition to an innovation economy". I particularly liked the following conclusion of this paper:

"Greece’s Euro-zone membership may have given the false impression that the economy might be driven by innovation. The Greek economy is not – it faces not only institutional but also severe structural deficits with a small industrial basis, low export ratio, small businesses and many closed professions. If decreasing labor costs and further institutional reforms were to be the only active policy, then Greece’s future would be a low wage economy with an extended workbench of other innovative economies. Greece can only become prosperous if it also uses its comparative advantages beyond tourism, trade and agriculture".

I still recall how enthusiastic I became about Greece's future potential when I first read the Greece Ten Years Ahead report by McKinsey. Reading through the above literature reinforced those feelings.

What if the Greek government felt the same way?