"My presentation will be structured as
follows. I will begin by discussing the origins of the euro-area crisis.
Next, I will describe the adjustment that has taken place within the
stressed countries. With Greece at the epicenter of the crisis, my focus
will be on what has happened in my own country. I will then turn to
some related issues, notably, the reasons for the deep economic
contraction in Greece and the problem of debt-sustainability. Finally, I
will discuss changes that are being made to the euro-area’s
institutional set-up and their implications for the single currency’s
future" - read full text here.
Friday, February 7, 2014
"Revenge" Of The German Constitutional Court?
In an article which I posted 18 months ago, I argued that the German Constitutional Court (GCC), if it felt played by German politicians, could 'revenge' itself by passing the OMT issue on to the European Court of Justice (ECJ) for a ruling. Well, the GCC has now done exactly that. Was it a revenge?
Personally, I think only very competent legal minds should opine on this issue because it is so complex. Not being such a legal mind, I refrain from voicing legal opinions. Two things surprise me, though.
One reaction is that the ECJ is likely to condone the OMT. That surprises me. After all, I presume that the members of the ECJ are legal experts like those of the GCC and if German legal experts found it so difficult to rule on the subject, why should it be easier for EU legal experts? On the other hand, the ECJ seems to have no intent to procrastinate: they have announced a ruling on March 18. So they must think that the issue can be handled with reasonable speed.
The other surprising reaction is that the GCC's decision is viewed to represent a major surrender of German sovereignty. I used to think that one of the EU principles was that EU law supersedes national law. Why would this be different in the case of the OMT? In the extreme sense, if a positive ruling on the part of the ECJ were in conflict with the German constitution, Germany would have to amend its constitution; wouldn't it? That would be interesting to watch.
Bottom line: if I felt 18 months ago that the GCC's passing the issue on to the ECJ would be a revenge, I today think that it is more an issue of helplessness.
Personally, I think only very competent legal minds should opine on this issue because it is so complex. Not being such a legal mind, I refrain from voicing legal opinions. Two things surprise me, though.
One reaction is that the ECJ is likely to condone the OMT. That surprises me. After all, I presume that the members of the ECJ are legal experts like those of the GCC and if German legal experts found it so difficult to rule on the subject, why should it be easier for EU legal experts? On the other hand, the ECJ seems to have no intent to procrastinate: they have announced a ruling on March 18. So they must think that the issue can be handled with reasonable speed.
The other surprising reaction is that the GCC's decision is viewed to represent a major surrender of German sovereignty. I used to think that one of the EU principles was that EU law supersedes national law. Why would this be different in the case of the OMT? In the extreme sense, if a positive ruling on the part of the ECJ were in conflict with the German constitution, Germany would have to amend its constitution; wouldn't it? That would be interesting to watch.
Bottom line: if I felt 18 months ago that the GCC's passing the issue on to the ECJ would be a revenge, I today think that it is more an issue of helplessness.
Thursday, February 6, 2014
Greece's 1st Bail-Out --- Promises, promises???
The publication of internal IMF documents from May 2010 (I have commented on one of them before) has created quite a stir in the media. First, the confirmation that quite a few countries had opposed the 1st bail-out, and for very good reasons, too, and then the alleged commitment by France, Germany & Co. to maintain their Greek exposures. MacroPolis published this excellent summary.
From the beginning, I have been amazed at the naivité ('incompetence' is so harsh a word...) with which the Greek external payments crisis was handled. No surprise that so many Latin countries voiced their objections. After all, they have a lot of experience with external payments crises!
An external payments crisis is quite different from a domestic financial crisis (at least in a local currency country). When Germany bailed out its HypoRealEstate, that was a domestic issue which could be handled by Germany alone. An external payments crisis means that a country (not only the state; the entire country) is running out of money which it cannot print. The Greek state ran out of Euros and since the Euro was/is not only a foreign currency but also the domestic currency of Greece, the external payments crisis automatically became a domestic crisis as well.
In an external payments crisis, all external liabilities of the entire country (i. e. not only those of the state) must be brought under control. Typically, this is done via a rescheduling of a country's entire foreign debt. The EU chose to refinance the foreign debt of Greece with tax payers' funds and the EU only brought the state's debt under control; not the debt of banks, of corporations and others.
To accept for face value the statement of a country's 'chair' at the IMF that the banks of his country will keep their Greek exposures would be a cause for dismissal in any bank's credit traininig program! Such commitments must be contractually binding (i. e. signed by all creditors) and they must also include, in addition to keeping existing exposures, a commitment to keep trade lines open.
Who is to blame? Both sides, the Greek side as well as the EU side. I know for a fact that PM Papandreou had more than one meeting with William "Bill" Rhodes, the former Citibank Vice Chairman and grand seigneur of managing external payments crises where Rhodes advised Papandreou what needed to be done in Greece's situation back in 2010. And the EU side? Well, the EU elites were just so self-possessed with their arrogance that they refused advice from those people who knew and they preferred to display their incompetence.
In retrospect, one has to give a lot of credit to PM Papademos. He knew that he needed the best advice; he asked for it; he chose the renowned laywer Lee Buchheit and he smoothly accomplished the largest private sector involvement which the world has ever seen. Hats off!
From the beginning, I have been amazed at the naivité ('incompetence' is so harsh a word...) with which the Greek external payments crisis was handled. No surprise that so many Latin countries voiced their objections. After all, they have a lot of experience with external payments crises!
An external payments crisis is quite different from a domestic financial crisis (at least in a local currency country). When Germany bailed out its HypoRealEstate, that was a domestic issue which could be handled by Germany alone. An external payments crisis means that a country (not only the state; the entire country) is running out of money which it cannot print. The Greek state ran out of Euros and since the Euro was/is not only a foreign currency but also the domestic currency of Greece, the external payments crisis automatically became a domestic crisis as well.
In an external payments crisis, all external liabilities of the entire country (i. e. not only those of the state) must be brought under control. Typically, this is done via a rescheduling of a country's entire foreign debt. The EU chose to refinance the foreign debt of Greece with tax payers' funds and the EU only brought the state's debt under control; not the debt of banks, of corporations and others.
To accept for face value the statement of a country's 'chair' at the IMF that the banks of his country will keep their Greek exposures would be a cause for dismissal in any bank's credit traininig program! Such commitments must be contractually binding (i. e. signed by all creditors) and they must also include, in addition to keeping existing exposures, a commitment to keep trade lines open.
Who is to blame? Both sides, the Greek side as well as the EU side. I know for a fact that PM Papandreou had more than one meeting with William "Bill" Rhodes, the former Citibank Vice Chairman and grand seigneur of managing external payments crises where Rhodes advised Papandreou what needed to be done in Greece's situation back in 2010. And the EU side? Well, the EU elites were just so self-possessed with their arrogance that they refused advice from those people who knew and they preferred to display their incompetence.
In retrospect, one has to give a lot of credit to PM Papademos. He knew that he needed the best advice; he asked for it; he chose the renowned laywer Lee Buchheit and he smoothly accomplished the largest private sector involvement which the world has ever seen. Hats off!
Monday, February 3, 2014
Re-Visiting May 2010
In a moment of boredom, I looked up the original Economic Adjustment Program for Greece of May 2010. Just to remind myself what the original plan had been.
Off the bat, I noticed that all numbers are in percentages instead of nominal figures. That's a cute technique to make future plan/actual comparisons difficult if not impossible. For example: GDP growth for 2014 was projected at 2,1%. Who knows? Maybe a miracle happens and GDP growth will turn out to be 2,1% in 2014. Everything ok? Of course not! This projected growth was based on the assumption that cumulative GDP declines in the previous 5 years would only be about 7%. Had the latter turned out to be true, things would be quite well in Greece today.
All divergencies from plan are attributed to using the wrong multiplier but how does one set the right multiplier? Can one do that without an indepth analysis of an economy's underlying structure and strength? Let me try an analogy.
Take two fireplaces. One is full of real wood and the other one has only artificial wood. Both are burning well. The former is burning well because there is a large glow of burning real wood. The latter is burning well because a pipe feeds gas into it. If one throws a bucket of water at the former, the fire will go down but, after the initial shock, the glow will rekindle the fire. In the latter case, the water will kill the flame.
What I am getting at is the productive capacity and potential of an economy. Put differently: Was Greece's economic fire of the 2000s the result of buring real wood or rather the result of having a good gas pipe? If it was the latter, no wonder that the flame went out.
I googled "greece productive capacity", hoping that I would find some statistics about it. I found some papers arguing general terms like 'Greece does not have much of a productive capacity' but I did not find any hard facts about what it is that Greece produces and what Greece could produce more of. What a shame! Here is a quote from John Maynard Keynes' book "The Economic Consequences of Peace":
"It is for those who believe Germany can make an annual payment amounting to hundreds of millions sterling to say in WHAT SPECIFIC COMMODITIES they intend this payment to be made and in WHAT markets the goods are to be sold. Until they proceed to some degree of detail, and are able to produce some tangible argument in favor or their conclusions, they do not deserve to be believed".
Preceding that statement is a most detailed analysis of the German economy's capacity to pay after WW1 and how that capacity could be increased. That is the sort of analysis which I would like to see about the Greek economy. One could easily take Keynes' analysis as a blueprint.
Off the bat, I noticed that all numbers are in percentages instead of nominal figures. That's a cute technique to make future plan/actual comparisons difficult if not impossible. For example: GDP growth for 2014 was projected at 2,1%. Who knows? Maybe a miracle happens and GDP growth will turn out to be 2,1% in 2014. Everything ok? Of course not! This projected growth was based on the assumption that cumulative GDP declines in the previous 5 years would only be about 7%. Had the latter turned out to be true, things would be quite well in Greece today.
All divergencies from plan are attributed to using the wrong multiplier but how does one set the right multiplier? Can one do that without an indepth analysis of an economy's underlying structure and strength? Let me try an analogy.
Take two fireplaces. One is full of real wood and the other one has only artificial wood. Both are burning well. The former is burning well because there is a large glow of burning real wood. The latter is burning well because a pipe feeds gas into it. If one throws a bucket of water at the former, the fire will go down but, after the initial shock, the glow will rekindle the fire. In the latter case, the water will kill the flame.
What I am getting at is the productive capacity and potential of an economy. Put differently: Was Greece's economic fire of the 2000s the result of buring real wood or rather the result of having a good gas pipe? If it was the latter, no wonder that the flame went out.
I googled "greece productive capacity", hoping that I would find some statistics about it. I found some papers arguing general terms like 'Greece does not have much of a productive capacity' but I did not find any hard facts about what it is that Greece produces and what Greece could produce more of. What a shame! Here is a quote from John Maynard Keynes' book "The Economic Consequences of Peace":
"It is for those who believe Germany can make an annual payment amounting to hundreds of millions sterling to say in WHAT SPECIFIC COMMODITIES they intend this payment to be made and in WHAT markets the goods are to be sold. Until they proceed to some degree of detail, and are able to produce some tangible argument in favor or their conclusions, they do not deserve to be believed".
Preceding that statement is a most detailed analysis of the German economy's capacity to pay after WW1 and how that capacity could be increased. That is the sort of analysis which I would like to see about the Greek economy. One could easily take Keynes' analysis as a blueprint.
Sunday, February 2, 2014
Emerging Markets - Greece On A Larger Scale?
Having lived in Chile/Argentina from 1980-87, the current outflow of capital from emerging markets feels like the re-run of a movie seen a long time ago. Today's story is virtually the same as it was then, namely:
First, something happens in an emerging market which conveys to foreign capital the confidence that risks are low and returns are high (in Chile, at the time, it was the Chicago-Boys taking over economic management; in Argentina, it was their mental relatives; and in both countries the exchange rate was fixed to the USD). Next step: an avalanche of foreign capital hits the emerging market. Next step: incomes and asset prices in the emerging market go up. Next step: much of the increased (artificial) wealth is spent on consumption of imported goods instead of investment, driving the current account balance into dangerous, negative levels. Next step: something happens (like the discovery of the negative current account balance; or the fear of Fed tapering) which makes foreign capital doubt that risks are still low and returns still high. Final step: foreign capital is withdrawn but, regrettably, much of it is no longer there.
This is the story of Greece! In Greece, it was the EU membership but, much more dangerously, the EZ membership which gave foreign capital the confidence that risks were low and returns high. What happened was the reverse of a personal depression. In a personal depression, the road into it is like a highway to hell but the road out of it is like a trip to heaven. Greece experienced the capital-inflow-period as a trip to heaven and is now experiencing the deep depression.
Is the above development like a universal law which cannot be escaped? Of course not. The easiest way to escape is for a government to control capital flows, on the way in as well as on the way out. However, capital controls are perceived as the Greatest Sin in today's world.
One might want to look at Switzerland. That country, relative to its size, has probably the largest capital inflows in the entire world. And yet --- the Swiss don't go berserk with that capital. Perhaps that is because the Swiss are boring people. Or perhaps that is because the Swiss know that nothing comes from nothing.
So perhaps that is the choice: either control the amount of food which comes on the table or educate the guests in the restaurant that, at the end of the day, there is no such thing as a free lunch.
First, something happens in an emerging market which conveys to foreign capital the confidence that risks are low and returns are high (in Chile, at the time, it was the Chicago-Boys taking over economic management; in Argentina, it was their mental relatives; and in both countries the exchange rate was fixed to the USD). Next step: an avalanche of foreign capital hits the emerging market. Next step: incomes and asset prices in the emerging market go up. Next step: much of the increased (artificial) wealth is spent on consumption of imported goods instead of investment, driving the current account balance into dangerous, negative levels. Next step: something happens (like the discovery of the negative current account balance; or the fear of Fed tapering) which makes foreign capital doubt that risks are still low and returns still high. Final step: foreign capital is withdrawn but, regrettably, much of it is no longer there.
This is the story of Greece! In Greece, it was the EU membership but, much more dangerously, the EZ membership which gave foreign capital the confidence that risks were low and returns high. What happened was the reverse of a personal depression. In a personal depression, the road into it is like a highway to hell but the road out of it is like a trip to heaven. Greece experienced the capital-inflow-period as a trip to heaven and is now experiencing the deep depression.
Is the above development like a universal law which cannot be escaped? Of course not. The easiest way to escape is for a government to control capital flows, on the way in as well as on the way out. However, capital controls are perceived as the Greatest Sin in today's world.
One might want to look at Switzerland. That country, relative to its size, has probably the largest capital inflows in the entire world. And yet --- the Swiss don't go berserk with that capital. Perhaps that is because the Swiss are boring people. Or perhaps that is because the Swiss know that nothing comes from nothing.
So perhaps that is the choice: either control the amount of food which comes on the table or educate the guests in the restaurant that, at the end of the day, there is no such thing as a free lunch.
Greece Will Be Rescued! (again)
SpiegelOnline reports that German Finance Minister Schäuble is working on a third rescue package for Greece. The numbers mentioned range between 10-20 BEUR. Great news! With that kind of a rescue package, a wonderful future for Greece will be assured!
Coincidentally, the 95-year old former top German banker Ludwig Poullain published an article where he vehemently argued that Germany should exit the Eurozone. Not only does he call the Euro a 'shroud over the economies of the periphery' but he also argues that the Euro, because it is cheaper than a new DM would be, slows down innovation on the part of German industry (because it is too easy for them to export). Hans-Olaf Henkel will be happy to have found a prominent ally.
So, the front lines in the debate are clearly marked. One side says that the system, however inadequate it may be, must be preserved at virtually all cost. And the other side says let's create a new system which is adequate.
The EU as a whole would be better off if there could be an open discourse, based on arguments and free of prejudices, about these two sides.
Coincidentally, the 95-year old former top German banker Ludwig Poullain published an article where he vehemently argued that Germany should exit the Eurozone. Not only does he call the Euro a 'shroud over the economies of the periphery' but he also argues that the Euro, because it is cheaper than a new DM would be, slows down innovation on the part of German industry (because it is too easy for them to export). Hans-Olaf Henkel will be happy to have found a prominent ally.
So, the front lines in the debate are clearly marked. One side says that the system, however inadequate it may be, must be preserved at virtually all cost. And the other side says let's create a new system which is adequate.
The EU as a whole would be better off if there could be an open discourse, based on arguments and free of prejudices, about these two sides.
Saturday, February 1, 2014
"Im Memory of May 2010" - IMF
On May 9, 2010, the IMF sent an Office Memorandum to its board accompanying its recommendation for approval of the Greek rescue package. Below are some interesting quotes from that memo.
* "The Chinese and Swiss Chairs emphasized that growth will eventually determine Greece's ability to manage its debt burden".
* "The exceptionally high risks of the program were recognized by IMF staff itself".
* "IMF staff admits that the program will not work if structural reforms are not implemented".
* "IMF staff acknowledges that the program will certainly test Greek society".
* "Several Chairs (Argentina, Brazil, India, Russia and Switzerland) lamented that the program has a missing element: it should have included debt restructuring and Private Sector Involvement".
* "The Swiss ED forcefully echoed the concerns about lack of debt restructuring in the program".
* "IMF staff pointed out that debt restructuring has been ruled out by Greek authorities".
It is interesting to note that the only European country departing from the EU party line ("Greece is merely a crisis of liquidity") was the non-EU member Switzerland. Were only those European countries free to speak their voice which were not EU members?
* "The Chinese and Swiss Chairs emphasized that growth will eventually determine Greece's ability to manage its debt burden".
* "The exceptionally high risks of the program were recognized by IMF staff itself".
* "IMF staff admits that the program will not work if structural reforms are not implemented".
* "IMF staff acknowledges that the program will certainly test Greek society".
* "Several Chairs (Argentina, Brazil, India, Russia and Switzerland) lamented that the program has a missing element: it should have included debt restructuring and Private Sector Involvement".
* "The Swiss ED forcefully echoed the concerns about lack of debt restructuring in the program".
* "IMF staff pointed out that debt restructuring has been ruled out by Greek authorities".
It is interesting to note that the only European country departing from the EU party line ("Greece is merely a crisis of liquidity") was the non-EU member Switzerland. Were only those European countries free to speak their voice which were not EU members?
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