Why Chile and not Greece?

Every time I have made the suggestion that Chile might be an example for Greece, I have received flak from just about everywhere. I can understand that because the Chilean economic model was formed and shaped during the reign of Augusto Pinochet and political correctness requires to think that everything which happened then was by definition bad.

On the other hand, I probably would not have started this blog if I hadn't lived in Chile in the early 1980s, during the time when the economic model was formed and shaped. By the mid-1970s, Chile had become much more of a failed nation than Greece is today. And yet, new economic policies led to a complete turn-around and laid the groundwork for an extraordinary economic development which lasts to this day.

Again, I see the flak coming because people will say that Chile today is not a success story at all. The uneven distribution of wealth will be cited; the uneven distribution of income; the Gini-coefficient; etc.

The point is, however, that Chile today looks back at 30 years of extraordinary growth; at an unemployment rate of 6% (down from around 20% 30 years ago); at a budget deficit of 0,7%; and at a national debt of 1% of GDP. In the last 10 years, Chile has weathered global economic down-turns exceptionally well. Chile now has a left-of-center President who plans to do some deficit spending for social purposes and investments in human capital. Good news! But the best news is that, thanks to the 30-year old economic model, Chile can afford such deficit spending.

I started this blog thinking that if Chile could make it, Greece could make it any time. Regrettably, Greece is not following the Chilean way but, instead, the Argentine way (where I lived for 4 years after Chile). It seems to me that what Juan Domingo Peron was to Argentina, Andreas Papandreou might have been for Greece.

One of the key elements of Chile's economic success was the top priority of foreign investments. Basically, the Chileans said "in order to grow, we need foreign capital and in order to bring our economy up to speed, we need foreign know-how". And, of course, the Chileans knew that foreign capital would only come if the country's creditworthiness was good and foreign investors would only come if Chile was an excellent place to do business. They put the public sector in order and they turned Chile into a wonderful place to do business.

End of story.

A Good Exchange with Nigel Farage

The video below lasts 3:22 minutes and, in a way, it says it all about the Euro.

Nigel Farage in the European Parliament on February 25, 2014

Exports --- THE Major Challenge for the Greek Economy!

Greek exports have grown since the beginning of the crisis. In my periodic analyses of Greece's current account, I have paid due attention to this fact. At the same time, I have always pointed out that, yes, exports have grown but, no, definitely not fast enough when considering the substantial internal devaluation and the decline of the Euro against third parties during the time (USD/EUR from about 1,60 down to about 1,35). Last year, exports even registered a decline over the previous year.

This article by Daniel Gros essentially reinforces my point in more detail. Suppose Greece still had the Drachma. That Drachma would have experienced a devaluation of at least 25% (combination of Euro-devaluation and internal devaluation). Wouldn't one have expected that such a devaluation would rather quickly lead to substantial export growth?

There is definitely the issue of the export capacity of the Greek economy but still: the Greek economy is operating way below capacity (so I read). So even if Greece was unable to discover new export capacities, at least existing capacities should have been better utilized. I have no details to prove this point but I think my general premise is hardly refutable.

Outstanding News for Greeks!

The Ekathimerini reported about a speech by Jose Manuel Barroso, where Mr. Barroso had excellent news for Greeks, as follows:

"The eurozone has overcome the crisis and Greece was an example of this success, said European Commission Jose Manuel Barroso during a speech at the European People's Party (EPP) meeting in Dublin on Friday".

I immediately called my friend Yiannis to congratulate him on the country's success. Yiannis, age 58, an architect who had lost his job a couple of years ago, told me

* that he was still unemployed;
* that even though he had only minimal income, he had to pay substantial income taxes because, as the owner of an apartment and a car, the government deemed him to have income;
* that they had to take their 15-year old daughter out of a private school because they could no longer afford it;
* that he had to make contributions to the engineers' pension system for another 12 months without knowing whether he would ever receive a pension;
* and, finally, that he was glad to have parents-in-law who could share with him their pensions.

I guess this proves the old saying that exceptions to the rule prove the rule. Yiannis must be an exception. Otherwise, Mr. Barroso would have told a lie and it is simply inconceivable that the President of the European Commission would tell a lie. Certainly not a couple of months before an important election!

Prof. de Grauwe's Views on How a Central Bank Works!

This widely re-tweeted article by Prof. Paul de Grauwe contains, in my opinion, a couple of very elementary mistakes:

Why the European Court of Justice should reject the German Constitutional Court's ruling on Outright Monetary Transactions

I have commented on Prof. de Grauwe's blog as follows:

"I am amazed how a reputable LSE professor could publish a paper including such elementary mistakes. Upfront, if Prof. de Grauwe’s point was to show that a Central Bank like the ECB can function even with a negative equity, he has made that point sufficiently clear. I suspect, though, that most everyone involved with finances knows that.

To suggest that interest received by the ECB flows through to national Central Banks is baffling. The ECB has its own P+L statement. Its pay-out to owners comes out of net profit; not out of gross revenue! If there is no profit (for instance because it had to write down bonds), there are no pay-out’s. Check back with Switzerland’s Central Bank which could not make a pay-out for 2013 because it had taken losses on its gold holdings. As long as the ECB has a negative net worth, it cannot pay out dividends.

Prof. de Grauwe seems to overlook that, contrary to the ECB, the national Central Banks, owners of the ECB, CANNOT operate with a negative equity (because they cannot print Euros). Should national Central Banks be required to recapitalize the ECB, that may well require recaps on their own and that, dear Professor, is indeed tax payers money.

Theoretically it is true that the ECB could, in fact, buy ALL Eurozone sovereign bonds out there, I take it 8-10 trillion Euros, and simulatenously forgive all issuers the debt. All that would mean is that the ECB would run a 8-10 trillon Euro negative net worth but that would not hamper its operations. In fact, it could do that until doomsday. That’s the theory. Anyone suggesting that the practice would unfold the same way should take a walk outside the ivory tower.

If Prof. Grauwe feels that the GCC lacks understanding how central banking works, he should take note that courts are not required to understand central banking. Courts are required to understand things like statutes of the ECB, EU law and, in this case, German law. If its statutes do not allow the ECB to fully act like a Central Bank should, then the founders of those statutes did not sufficiently understand central banking. Then those statutes should be changed."

Frances Coppola Hits the Nail on the Head. Finally!

Frances Coppola declares that she has come 'off the fence' and writes this outstanding article:

The ECB is irrelevant and the Euro is a failure

My comment to this article is below.

"This is an outstanding analysis! Had you come 'off the fence' earlier, I would not have misinterpreted many of your opinions which, to me, focused far too much on monetary policies and instruments. European elites are always quick to criticize Americans when they intend to introduce the American way of life to other cultures. They accuse Americans of lack of cultural understanding and sensibility. What we have seen in recent years is a dramatic lack of cultural understanding and sensibility WITHIN Europe; certainly within the Eurozone. (Lord) Ralf Dahrendorf said in a 1995-interview with Der Spiegel the following: "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...The idea of a common currency union is a big mistake, an adventurous, reckless and mistaken goal which will will not unite Europe but, instead, divide it".
I have been married to a Greek for almost 40 years but only since my retirement 3+ years ago have I spent more time there; about half of the year. And I am only beginning to scratch the surface when it comes to understanding 'how Greeks tick'. Instead of understanding how individual cultures tick and adapting to it, EU-elites have put a value judgement on it: 'if you don't tick the way we think is right, then you have to change'. Good luck! Just a Greek problem? Well, have the French, the Italians, the Austrians, even the Germans - have they radically changed their cultures in the last 100 years? You hit the nail on the head when you said "You can’t overturn tribal and cultural identities that go back thousands of years at the stroke of a few politicians’ pens".
I link below an excerpt from The Encylopedia Britannica 1911 (!) describing Greek mentalities and cultures. Everyone is invited to judge how much those mentalities and cultures have changed in the last 100 years. And now we are expecting that they will change within a few years? And all of that because of the wonderful unifying currency called Euro?"

Encyclopedia Britannica 1911

Greece - Still a Failed Nation?

In this recent article, Prof. Yanis Varoufakis says that "Europeans must grasp a simple fact - that Greece has been, and remains, a failed nation-state". He concludes with the following facts:

* There are 10 million Greeks living in Greece (and falling fast due to migration), ‘organised’ in around 2,8 million households that have a ‘relationship’ with the Tax Office.
* Of those 2,8 million households, 2,3 million have a debt to the Tax Office that they cannot service.

* 1 million households cannot pay their electricity bill in full, forcing the electricity company to ‘extend and pretend’, thus ensuring that 1 million homes live in fear of darkness at night while the electricity company is insolvent.

* Of the 3 million people constituting Greece’s labour force, 1,3 million are jobless.

* Of the 1,3 million jobless only 10% receive unemployment benefits. The rest must fend for themselves.

* Of those who work in the private sector 500 thousand have not been paid for more than three months.

* Contractors who work for the public sector are paid up to 24 months after they provided the service and pre-paid sales tax to the Tax Office.

 * Half of the businesses still in operation throughout the country are seriously in arrears vis-à-vis their (compulsory) contributions to their employees’ pension and social security fund.

These clearly are facts of a failed nation. Regrettably, it is not possible to segment these facts into the failed part of the nation and that part which has not failed at all.

Suppose, in theory, there were a list of all 11 million Greeks, ranking them by personal net worth (including foreign assets). My sense is that the upper 10-20% would certainly reflect a very successful nation. Regrettably, such information cannot ever be put together.

My sense of Greek society is that, since Independence, the few have always benefited at the expense of the many. The Euro acted as a turbo in this development. A failed society more than a failed nation-state.