Greece: So what next?

It is a week now that the main issue of reopening the greek program appears to have been resolved. Nothing has been really been agreed, except for a likely slight relaxation of this year's primary surplus target and that no policies shall be enacted with a fiscal impact. The rest is to be agreed, and effectively discussions for program 3 are now open and have a deadline of June 30, 2015.

The entire effort of the two protagonists, Varoufakis and Tsipras, has been on this issue, and this is logical. However, now comes the need to pull together the government and make it function in line with what has been explicitly or implicitly or tacitly agreed. Because the one clear message is "DO NOT GO ON A SPENDING SPREE" during these 4 months. This is the testing period for the government, and showing that it controls things and can deliver is of primary importance. 

This is true on two fronts: the external, where many governments hope that Syriza will demonstrate total incompetence, hence they can then finish with Greece once and for all for fault. Other governments just hope that an obedient government will come to power, replacing Syriza. Nobody really wants a success for Syriza.

Then there is the internal front, where the real issue is. This is where success or failure shall be determined, because even if Greece is eventually forced to exit the euro or otherwise defaults without debt relief, the economy's performance shall determine the outcome for the country. Although there are some political and economic interests that oppose Syriza, that is not the main problem. The first is internal opposition within the party of Syriza. And the second is the total lack of managerial experience of yet another prime minister and minister of finance. The combination of these two seems catastrophic.

So what are we seeing on this front? The Syriza government is not functioning and its ministers seem to think that they can do whatever they want for 4 months. A clear policy for these four months needs to be established and followed strictly. There is only one thing to do: prepare and agree the new program. No resources should be wasted on other things. I will outline certain basic management concepts, including key confidence building actions, which I think would be useful particularly during this period:

1. Establish a clear management structure for the government's functioning with rules for and coordination of all actions and announcements regarding government policy. The present image is one of complete lack of coordination and management with a lot of confusion being generated on a daily basis. The issue of the prototype schools comes to mind.

2. Expectations' management: the government should refrain from doing or announcing things it cannot do or things that are contrary to its pre-election promises with respect to the majority of the electorate. Even minor such things can destabilize popular support and bring collapse. It is better to lose the support of 2-3 special interest groups such as e.g. the ERT personnel, than ridicule yourself as a government in front of the entire electorate by e.g. increasing the television tax - which used to be sufficient - to pay for them.

3. Putting together the details and the numbers of the new program, MOU #3 or, in politically correct words, the Agreement. No time or effort should be wasted on other things, four months is very little.

4. Put all effort in revealing and cutting wasteful expenditure. This should not be that difficult and has limited political cost, but requires a change of heart for most Syriza people.

5. Identify certain cases of real major tax fraud and corruption covered up by the previous governments with the purpose of maintaining a sense of fairness and political support while difficult real reforms are planned. This should be only too easy to do. Syriza should also demonstrate leadership and modernity by avoiding Mccarthyist tactics used in the past.

6. Restore basic faith in the tax/judicial system in line with pre-election promises. This will also help stop capital flight and restore small business confidence.

7. Stop the tax uncertainty, primarily for indirect taxes. This should also have a direct effect on consumption, which was affected in the last few months by the obvious impasse with the troika and the expectation of new taxes.

8. Take simple cheap measures for the humanitarian crisis. This is probably the only one being implemented but its costs and financing seem unclear.

Failure to achieve what needs to be achieved, without ideological fanaticism, is a must if the country is going to come out of the mess of the last decade.

A Foreign Policy magazine view on "Merkelism". Sad times for the European Project

https://foreignpolicy.com/2015/02/19/greece-should-not-give-in-to-germanys-bullying-euro-syriza-merkel-varoufakis/

and, as a sign of the German Government's failure to explain what has happened to its people, german tabloid ideas about European Union, reminding other, sadder, times:

http://www.bild.de/politik/startseite/politik/home-16804552.bild.html

As also confirmed by the Union of German Journalists:

http://www.djv.de/startseite/profil/der-djv/pressebereich-download/pressemitteilungen/detail/article/sofortiger-stopp-gefordert.html

Twisted Economics

Greece's letter to the Eurogroup: At last Greece takes ownership of its program!

This morning Greece's new government sent a letter to the Eurogroup describing the reforms it intends to implement. The text can be found on the internet, a sample reference is provided at the end. I will make only two key points:

A. Dramatic qualitative change: This is the first and only time that a Greek Government has taken ownership of a program. This is no longer something being dictated from foreigners which the greek government will do everything it can to circumvent implementation, as happened for 5 years now. Hopefully...

B. Content: This looks like unfortunate program #1 of the spring of 2010 which was only 1/4 implemented. That program had four axes: tax more/transfer* less, spend less, reform public sector, liberalize markets. It has differences, but the direction is the same. Yet program #1, due to being imposed and not owned by the Greek government, resulted in only one thing being done: increased taxes and cut transfers (where public sector wages should be viewed as mostly transfers...).


* Transfers in this case means all government revenues and payments which are related to non funded policy schemes with accumulated liabilities such as pensions, mandatory health insurance, and employment obligations. So transfer less means either increase social security contributions or decrease payments for health, pensions and non-market/non-productive salaries.


Sample reference: http://clamo.ftdata.co.uk/files/2015-02/24/GREEK%20GVT%20REFORM%20AGENDA.pdf

Germany's Pyrrhic Victories and Signs of Hubris: Ukraine and Greece

Germany is unquestionably the leading economy within the eurozone. Yet it seems that it has also decided to lead, whether by default or on purpose, the European Union and particularly the Eurozone. There is already a plethora of voices discussing the issue, as the link provided below and the recent critique of philosopher Habermas, so I will avoid repeating the arguments. The point I would like to argue is that Germany is doing a very bad job of leading Europe despite appearing to get its positions imposed, inflicting long term losses not only on others which they call friends and partners, but ultimately to itself. And I shall use the Ukraine peace effort and the Greek sovereign debt crisis -episode 3 - as examples.

Ukraine: If I were writing a novel, I would start with "Europe's boss, taking hand in hand her alibi Francois, went for a romantic walk along the shores of the river Donets". However this is not a novel, it is real war with real dead and high emotions on all sides. So what did Germany do wrong here? (A brief background is provided in a PS at the end).

1. Merkel was self appointed as informal EU leader on the issue despite the specific provisions of the Lisbon Treaty providing for a High Representative of the Union for Foreign Affairs and Security Policy to represent the EU in foreign affairs, ignoring basic recent concepts of the Union's rulebook. Dragging along Francois Hollande, who needs to increase his visibility at home, as an alibi that this is two major players in Europe doing things, not the EU.
2. Merkel displayed incredible hubris in doing so: The Ukraine has been a target of German foreign policy or practice: the holding of part of it by the Austrohungarian Empire, the immigration of the Ukraine by Germans in the 19th century, the subsequent treaty of Brest Litovsk of 1918 that handed it to Germany, and most recently the invasion of the Ukraine by Nazi Germany in 1941 which required a lot of Russian blood to be spilt in liberating the Ukraine. When Germany tries to mediate between the Ukraine and Russia for a cease fire which can only work against the Russian nationals in the Ukraine, it is an insult to Russia. It is the equivalent of Israel mediating between Saudi Arabia and Iraq after the invasion of Kuwait, of Taiwan mediating between the PRChina and Japan, of the USSR mediating the reunification of PDRGermany by West Germany.

So Merkel went away, as a modern Chamberlain leaving Munich, thinking she had achieved peace and a diplomatic victory on Germany's vision of the Ukraine. And quite similarly to the subsequent 1938 invasion of the Sudetenland, Putin is increasing his military support for the separatists...

Greece: It is clear by now that Germany has coerced the new Greek government into submission over the last 2-3 weeks, only waiting the list of additional taxes baptized reforms to complete this. It is one more victory for Germany over the "spendthrift and lazy Greeks". What did Germany do wrong here:

1. It has shown once again that it considers itself as the undisputed rightful boss of the eurozone, taking over the negotiation with Greece as if it was only Germany who provided loans.
2. It has won once again brownie points by telling Greece to repay all its debts. Yet this is an impossibility, once again postponing the inevitable and continuing failed austerity with a new name.
3. The inevitable default will only lead to the complete destabilization of Greece, adding to the world's problems, without getting any loans repaid anyway. Greece was economically and socially destabilized already, the basis of Syriza's victory, it can now go on collapsing. Capital flight will only continue and no sensible investor will put his money into increased uncertainty.
4. It has shown to all euroskeptics that their nationalistic arguments against the euro and the EU are 100% valid. As Podemos leader said, if Germany does not relax austerity for Greece, they should expect to be talking to Marine Lepen's Front National in the near future. It also proves to the UK that not joining the euro was the wisest thing ever done, thus retaining sovereignty.
5. It has worked up on nationalist lines its own population, undermining even more the European Project. Tabloid titles remind of other sadder times.
6. It has proven to Poland that being in the EU/NATO protects from Russia, not being in the euro protects from Germany.

This sounds pretty pyrrhic .. no debt repayment, no or less euro, no european integration, more nationalistic Germans.

PS 1: A recent example of the discussion on Germany's self assumed Euro-boss role.

http://www.bloombergview.com/articles/2015-02-22/germany-thinks-it-s-europe-s-boss-on-greek-debt

PS 2: Brief background on Ukraine crisis: The West and Germany in particular, has tried to get the Ukraine to become part of the EU and had spent years pushing for entry negotiations/other preentry status . The change of the elected president's stance on the EU resulted in a "popular" revolution to topple him, with the full blown support of the west. This is fundamentally a sort of a coup d'etat, as it was focused on the nationalistic Ukrainian Kiev area and ignored the majority russian rest of the country. As Russia views the Ukraine as part of Russia and not merely a satellite state under the Yalta Treaty, it is inconceivable to them to let go of the Ukraine, and even more the majority russian areas. So they immediately reacted with annexing Crimea, an area where very few ethnic ukrainians had ever existed and was only a historical administrative transfer from SSRussia to SSUkraine; and since then, they have been supporting the separatist Russians in the east part of today's Ukraine.

Some fun but with two way interpretation possible...

Reportedly from the Irish times, but taken from social media.

Greece is restarting, for the third time, its sovereign debt crisis: will it end up in further misery due to compromise?

Greece entered its first sovereign debt crisis in December 2008 when the spread over bunds started diverging significantly. The end of this first sovereign debt crisis was in the spring of 2012, with the PSI; after causing a major depression after two years of austerity for its people and no equivalent austerity for its sovereign near defaulted borrower and despite MOU # 1 of 2010.  On determining the non sustainability of the debt, the Greek state, in agreement with its official lenders, defaulted officially towards remaining foreign private lending institutions, its own banks, hospitals, universities, insurance companies and pension funds. It was then said that the level of debt forgiveness was adequate for restoring macroeconomic balance and that growth was just around the corner otherwise. This restarted the clock on the greek sovereign debt crisis, with MOU #2.

The big differences of MOU #1 and MOU #2 were the author and the emphasis. MOU #1 was written by the IMF even prior to 2010, when it was signed, in its various reports and analyses. It had four axes: increased taxation, decreased government spending, market liberalization, state reform. MOU #2 was written effectively by the largest bailout partner, Germany, with debt repayment only in mind to please its own constituency: many more taxes, less social welfare, english law, save the banks, privatize indiscriminately, high primary surpluses forever, and a formal repetition of some of the previous stuff on which nothing had been done; and never subsequently really pressed to do. It is a surprise it even recognized that the actual debt had gone up despite the partial forgiveness, which is the first admittance of amajor failure of the program. The IMF, despite words to the opposite, was coerced to follow and used unrealistic growth projections in the middle of a unique historically non war related depression, to justify the impossibility of debt sustainability.

2013 and 2014 were a demonstration of further economic collapse, despite non educated political hooliganism, mistaking as underlying long term growth what was essentially a one off tourist boom and some further defaults of the Greek state to its own citizens. Yet it was clear to anyone willing to think, that the underlying problems and country management that had brought the greek state to collapse had not only not improved, but instead remained either the same or even deteriorated. Thus, despite a lot of words to the opposite for some time, especially by the Greek sovereign's management team, the enforcers of MOU #1 and #2, based on reality, told the management to clean up their act. But cleaning their act required either accepting their failure and renegotiating, or defaulting, or continuing squeezing the people and not the continuously spendthrift and unproviding Greek state. Or abandoning ship, which is what they did, and handed over the hot potato.

It is clear that no debt forgiveness or other substantial change was agreed in the latest Eurogroup, despite the noise. It is rather clear that until a new program is agreed the MOU #2 still holds and shall sort of be concluded. Unless there is some hidden agenda for Athena delenda est through e.g. Malta's parliament not accepting the agreed extension of the loan,  it seems that agreement was reached on discussing a sort of new program. Such new program or MOU #3, if concluded, will effectively restart the clock on the debt crisis for the 3rd time.

As argued in the past and as 100% of american economists insist upon, debt forgiveness of a massive scale needs to be accepted if Greece is not to eventually default, sooner or later, with plenty of collateral damage. No one of those insisting on it thinks of this as a sufficient condition for eventual debt sustainability or growth, yet it is clear that it is a necessary precondition for debt sustainability and growth. So the risk remains that once again European politics of federalist compromising will fail to do what is really required to at least give Greece a chance and MOU #3 will not be a solution but rather another 10-15% drop in GDP and disposable income; and a poor, destabilized, and haunted by vulture funds Greece shall be the only thing left.

This is where the current government has only one option: to eventually insist on debt forgiveness after showing that it can do good things for Greece's economy with the risk of a meltdown everpresent. Does it have the strength,guts, popular support and clear thinking to do so? Will it ultimatelybe able to explain to Greeks the need to default if the debt forgiveness does not take place? Does it have the guts to then ridicule the eurozone by refusing to leave while defaulted (after all, Detroit did not leave the dollar when it defaulted...)? Does a blind to economic reality opposition (ex-government) have the guts to stop arguing in favor of its failure of achieving a primary balance through pauperization? Does (Germany's) Europe have the willingness to go on with the European Project and show true solidarity and lack of stubborness? Does Germany's government have the guts to accept reversing the european catastrophic policy of austerity and explain it to its people? After all, the lenders' governments can never recover the money used for saving their own banks, only pretend to do so till they have also handed over their own hot potatoes to others.

First corrections of troika imposed economic policy and the magic number 7: Partly absurd and demagogic

We have seen a lot of the new Greek government and its negotiation with the rest of the Eurozone. However, ultimately, it is what it does in the country that will determine its success or not. And I am amazed at how dividing and demagogic these are. And prior to awaiting a deal with the eurogroup, in a silly - to say the least - attempt to create a fait accompli. If I were any Eurogroup Finance Minister, I would request smacking Greece on these as a precondition for any deal. Using the protestant ethic on Varoufakis is at least not productive and builds nationalistic support for him; pointing out and correcting demagogic attempts within the country can be much more effective and correct; but, ironically, this is also against the troika's previous advice...

In detail:

1. Proposal for protecting the main residence from bank seizures and auctions

http://www.kathimerini.gr/804345/article/oikonomia/ellhnikh-oikonomia/ka8olikh-prostasia-apo-pleisthriasmoys

Anyone with an economics education seeking to provide a social protection for cases where people have been unable to pay their debt service for their house knows that the first criterion is to connect income, cash at hand and potential cash at hand (sources of repayment) to debt service. Is this what they are doing? 

They have actually identified the abovementioned sources of repayment. But are they linked to debt service??? NO: Instead of being used to check the ability to pay, these, with the use of the magic number 7 (70,000 income, 700,000 real estate, 70,000 deposits) are only used to safeguard actual and potential voters of Syriza. And coupled with a total "objective value"of 400.000 for the value of the primary residence  - one more 700,000 would include some who will never vote for them -, all those who are clearly anti-Syriza are excluded from benefiting from this.

So a non typical household where both husband and wife still have a job, can decide to not pay the bank even if it is able to pay debt service of say 10,000 a year; they can simply wait and see without doing anything! How is this healthy for the banking sector or the economy or for debtor behavior? Moral hazard at its maximum!!!

2.Tax settlement and forgiveness

Here details remain a bit unclear as it seems to still be cooking, but the aim is clear: make the burden much much lighter, even forgive principal, for 3.5 million voters. 

It is clear that it was impossible to go on as before: new taxes were imposed with a troika approved stupidity of estimating the ability to pay of these taxes at levels of 70%! i.e. a tax was imposed where it was already known that 30% of the people could not pay it. It is clear that this was going to, sooner or later, require correction, and to a large extent is what is happening. Yet the way this is being done is not through a link with the ability to pay, but on absolute terms, just like the primary residence protection above. It is also "marketed" as a present to existing and potential voters, rather than a correction. With all the moral hazard effects once again. And, of course, excludes the tax of the right wing supporters who had large real estate holdings...

3. Domestic Debt Prisons: When democracy collapses...

And of course the first near complete turnaround on debtor prisons comes along, at the same time the country is negotiating a release from its own debt prison! Greece is one of the few countries where to owe to the state is legally worse than tax evading! Today if you owe 5.000 euros you can be arrested at any random police check and taken to prison! If you tax evade, you wait for a court decision ad infinitum though your assets may be seized in the meanwhile... And of course you may owe without prior notification or a chance to appeal legally - you can only appeal once you pay 50% of the tax, even if you do not have to pay it or it can destroy your business!!! Many people have been driving happily with their families and have suddenly been dragged out of their cars to prison without knowing the reason, a complete and total offense to any sense of decency! And of course such collapse of reason and due process only leads to people wanting to avoid investing in Greece while Greeks want to keep their money outside the country, outside the reach of the Greek authorities against whom there is no protection of law.

Instead of fixing, as a priority, this complete breakdown of the basics of democratic principles (troika imposed also) which they have promised to eventually do (let's see, when money is missing, things change), they are simply raising the limit to  go to debt prison to 50,000. Maybe... still unclear. Yet they had promised to stop this thing altogether, properly acknowledging prior to elections that if you put somebody in prison while he cannot pay you or when he has been unable to appeal to justice,  society sort of does not work well. Just like Greece and its bailout funds...

FYI The primary surplus and the non sustainability of greek debt 101

http://www.bloomberg.com/news/articles/2015-02-19/why-greece-won-t-ever-be-able-to-pay-off-its-debts-with-austerity

FYI: Darkleaks

I came across this on new technologies, it is interesting but sounds scary...

http://www.coindesk.com/meet-darkleaks-bitcoin-powered-black-market-secrets/

Why did the latest Eurogroup result in confrontation? An alternative view based on just published documents

The latest Eurogroup ended with a confrontation between the new greek minister of finance and all the rest. Varoufakis was actually accused of lying, not being prepared, not proposing anything, not committing to anything etc. Given my personal experience with negotiations, I was wondering if this was true or if it was the first rule of negotiations 101: If your opponent has a good negotiator, take him out by discrediting him to the people who mandated him.

The MoF disclosed the documents of the Eurogroup, including the non papers given by Varoufakis and the alternative texts for the Eurogroup communique, all in good english, showing that there was plenty of preparation and that Varoufakis did not lie on the two alternative communique drafts:  http://www.naftemporiki.gr/cmsutils/downloadpdf.aspx?id=917523

This has actually proven to me, at least, that the reason for the failure and the subsequent discrediting tactics was the fact that they did not like what he said as it hurt the interests of eurozone companies and mostly German ones for that. Let me pick, inter alia, some things the Greek government committed to do differently that are likely to hurt the interests, existing or hoped for, of companies based in certain Eurogroup countries, including greek interests:

1. They will examine future privatizations on their own merits and not dogmatically

2. They will make procurement transparent

3. They will attack tax evasion/avoidance through transfer pricing for multinationals present in Greece and fuel contraband

4. They will "undermine rent-seeking, in particular in the oil sector, procurement, the construction sector, the financial sector, and the media"

Rent seeking, in economics, means those who exploit market imperfections, usually market positioning, to extract higher profits than in a fairly competitive case, e.g. banks charging 800 basis points to healthy companies for loans. 

The pauperization of Greek households in numbers other than GDP, and the remedy's problem demonstrated

**Warning** this is a bit technical and number heavy and boring for most

It is almost unthinkable that after 4 years of a debt program and of "reforms" things have not yet stabilized for the greeks. The level of the adjustment, which now is well beyond the initial need for a c. 15% drop in the government spending part of GDP, exceeds the great depression and is most pronounced at the household level where disposable income has dropped quicker than GDP. GDP is a measure of production, not a disposable income or standard of living index, and understates the effect on people. GDP may have been an adequate measure of the drop in income in the 30s, where government budgets started from a healthy point. In the case of Greece, the effect is more evident in the disposable income figures rather than GDP.

The Greek Statistical Authority today relased a report on household income and consumption for 2013: http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A07061/PressReleases/A0706_SEM91_DT_AN_00_2013_02_P_EN.pdf


Here are the points to take away:

Household disposable income fell a total of 30% between 2010 and 2013, while consumption by 22% while GDP at 24%. The biggest  drop in disposable income of 10.2% was in 2013!

Households dipped into their savings to fund the difference in 2013, with the gross savings rate dropping to -6% from positive before.

At some point this negative savings rate will also show in consumption with a time lag and reduce GDP which in 2013 was saved by the negative savings rate.

During the same period, government spending fell a total of 22%. So the main responsible of the crisis, the spendthrift Greek state, adjusted much less than households, which explains why GDP had to fall much more than was required if the adjustment had been done at the source of the problem. This is further empirical evidence in relation to the post of 26/2, point 3, on lessons from the greek debt crisis, where the argument is that the adjustment could have been done with much less pain if it had been done at the source of the problem.

And some fun

ECB voting rules: the absence of logic and of representative democracy

The following link is an article on ECB voting rules. I have read it a few times, and find the whole thing simply absurd, as demonstrated e.g. by the fact that the Netherlands has equal voting posts as Spain or Italy.

http://www.euractiv.com/sections/euro-finance/ecb-voting-rights-rotation-raises-fears-germany-302884

What is even more worrisome, is how certain people view the rules: when not convenient anymore, change them!

Eurozone-Greece, 2 to 0: Why does it appear as a win win for eurozone governments to throw Greece out, no matter what

Background

Last night the majority of European Finance Ministers, told Greece to beg for an extension of the current program without even offering some window-dressing for the newly elected government. As there was a lot of publicity, it looks like the first time that this has happened. This is however the outcome of a gradual buildup.

The previous government,genuinely believing that a magic wand had been applied to Greece to bring back growth and despite standard micro and macroeconomics, promised in the summer of 2014 to the Greek people an end to the troika program, remembering once again Samaras' promises of 2010-11. Not a single party in Greece proposed extending the MOU or imposing further austerity in 2015.

However, in the fall of 2014, the reality of the economy was back on the table again: the growth of 2014 was a one off injection from a huge increase in tourist arrivals and a smaller increase in tourist receipts, and the rest of the economy continued contracting as internal demand wavered and businesses and people kept on fleeing the unfriendly tax, business and lack of financing or employment environment. The troika was well aware not only that the primary surplus was overstated as a number of expenses was hidden under the table, but that 2015 posed challenges to the optimistic counting of the Greek ministry of finance.

So despite some signals towards ending the program in 2014, the troika in December rejected all proposals of the last government even though these included additional taxes and wide-ranging further reductions in social security and pensions, without proposing something instead. They also rejected certain measures of the Samaras government which were taken unilaterally, such as the 100 installment settlement of overdue tax obligations. The Samaras government left the negotiations inconclusive and went for slightly early elections which both the troika and he knew he would lose.

So effectively in late 2014, the previous government was already given an ultimatum it could not comply with. Therefore yesterday's rejection is only a continuation of previously made decisions, although there is one big difference: the troika rejection did not have the political implications of yesterday's ultimatum as it was on a technocratic level.

So what is really going on? A hypothesis for testing

I shall formulate a hypothesis which seems plausible: The eurozone leaders, knowing in 2012 that the Greek economy had already passed the point of no return, made a decision to "help" Greece for the last time and ensure that the eurozone was able to cope with a failure of Greece to comply with the program and be forced/allowed to exit the eurozone. And as Greece moved towards the inevitable while its people kept facing economic disaster, it would serve all best if the "accident" happened in the hands of a euroskeptic party.

Substantiation

- Passing the point of no return: IMF officials had to struggle with assumptions to substantiate - but hardly convince the trained economist - that the greek program would keep the external debt manageable. Even in 2013-4, there were voices in the IMF suggesting doing debt forgiveness. So there seems to be no actual further cost from a Grexit, as the money already lent is already lost.

- Eurozone banks are now totally insulated from a Greek default, after having been bailed out from 2010 to 2013, despite a cut, with the bailout being funded mostly through new greek state loans.

- Apart from official lending, vulture hedge funds have taken their place as English law has replaced Greek law, so the Greeks will continue to be penalized for their failure if they do not submit to the ultimatum and prefer to default.

- Most EU governments face serious challenges from euroskeptic parties, with the most apparent threats in France, Spain and the UK. Crushing the first euroskeptic party to take control of a country is in their best political survival interests. The inability to think that such non-union mentality standoffs may actually fuel euroskepticism does not seem to be on their minds.

- Old cold war sentiments still arise psychological reactions to anything that is called left, especially if it is called radical left with a communist twist.

- Prejudices about Greece and Germany, both of which remain unsubstantiated (separate notes on this are in the works), are being continuously invoked.

- Greece stands out as a confirmation of the prejudices, when compared to Portugal.

- Greece will be a problem again and again unless the debt is written off, and governments will have to apologize to their people for it, so why bother when there is a scapegoat? Or else, the I-am-fed-up-with-you factor.

- Handling of public opinion: every time the issue of Greece comes up, public support for the euro drops in most countries. So finishing the Greek issue once and for all may stabilize euroskepticism.

A Further Hypothesis which I wish fails testing

It seems that the lessons from the divides that brought about WW 2 have now been forgotten in Europe as the generation of politicians who had lived that disaster has passed away. Politicians are generally not people who have worked in the challenging private sector but rather civil servants or professional politicians. The political morality of Europe over the last few years has resulted in electing those who do the fewer mistakes, not those who try to do things and unavoidably, make mistakes and enemies. Politicians have therefore built a mentality for doing the least damaging politically, and not the correct for their people.

And European Unification has suffered. While we should be strengthening the common market, currency, laws, free circulation of people, goods and services, instead barriers of various sorts are being erected under the pressure of narrow political interests and budget pressures. And not a single market unifying act has been implemented for more than 10 years, with the exception of the self serving european bureaucracy's single divorce jurisdiction directive. As one German journalist wrote "I never thought I would miss Helmut Kohl"!

Economic History as a tool at its best: The Weimar republic and Carthagena

On the just announced ultimatum of the Eurogroup to Greece:

http://krugman.blogs.nytimes.com/2015/02/16/athenae-delenda-est/


On the similarities of the bailout program for Greece to the Weimar Republic and the Treaty of Versailles:

http://www.nytimes.com/2015/02/16/opinion/paul-krugman-weimar-on-the-aegean.html?action=click&pgtype=Homepage&module=c-column-top-span-region&region=c-column-top-span-region&WT.nav=c-column-top-span-region

Philosopher Habermas on Germany

As a supplement to the previous post.


http://www.thetoc.gr/eng/politics/article/j-habermas-strong-criticism-on-germany-undermining-the-eu

Bundesbank is now replacing the ECB: Masks falling on how Germany's Bundesbank thinks of the eurozone

http://news.yahoo.com/bundesbank-urges-greek-banks-not-buy-short-term-110442519--sector.html;_ylt=AwrBT9gfCeJUL7kAjkZXNyoA;_ylu=X3oDMTEzcG01bW4yBGNvbG8DYmYxBHBvcwMxBHZ0aWQDU01FNzAzXzEEc2VjA3Nj

Whether correct or not, this would be something the ECB should be saying, if it so thinks, to the Greek banks. Or, formally speaking, to all banks in the eurozone, if we have an EU and a monetary union. But when the ECB is being circumvented and the Bundesbank thinks it has a say over what banks incorporated in another member state do though they have no presence in Germany, the Bundesbank is proving that it neither believes that a. we have a European Union/single currency nor b. in the ECB being the only institution having a right to control banks on a European level. It rather reminds us of German history of hegemonism, as recently pointed out by German philosopher Habermas.

Imagine the Greek Central Bank telling, in 2006, Eurohypo Bank (D) that it is recklessly lending in European real estate. With the subsequent biggest bank bailout in eurozone history since the 1950s... Obviously the Bundesbank thinks that we have the euro for them to export their unemployment, but otherwise each country is responsible alone. In which case they should also keep in mind that default alone may also occur when the basics of the democracy, equality and justice are being tramped over, let alone ethnic prejudices.

Enough said for EU, let us now say ED(dissolution)

Lessons from the Greek debt crisis: How Greece could have done things differently in 2010

According to macroeconomic theory, a country needs to go through painful unemployment and recession in order to adjust within a fixed exchange rate or common currency regime when an external imbalance arises. This is repeated by politicians to justify the drop in GDP and living standards that follows. It can also however mask bad economic policy-making, as I suggest has happened in the case of Greece with the blessing of the IMF, the EU and the ECB. I will propose 3 ways this could have been done in Greece in 2010 to significantly reduce the magnitude of the 30% contraction to date.

Greece, between 2001 and 2010 lost competitiveness with inflation c.15% above the eurozone average. The usual mechanics of a fixed exchange rate, loss of demand leading to a fall in prices/containment of inflation did not happen as German and French banks lent the Greek state and thus sterilized the external imbalance, with an equal current account and government deficit (the double deficit). During 2009, the private lending was replaced by Greek bank borrowings from the ECB and purchases of government debt, equal to 15% of GDP in one year. And thus came about the Greek sovereign debt crisis when in late 2009 the ECB said it would no longer fund the greek banks for this purpose*. 

A 30% contraction of real GDP, all of it coming from the private sector of the economy as a simple reading of unemployment figures shows, has rectified the double deficit. Portugal did a much smaller adjustment of its economy for a pretty large deficit also. Here are the 3 things that Greece could have done in 2010 to minimize the impact of the adjustment, which are equivalent to an internal devaluation:

1. Take measures to increase productivity of the economy as a whole and particularly of the spendthrift state apparatus, whose expenses fueled the problem. Many such measures were included in the first MOU, such as reenforcing the competition authority, liberalizing markets, closing sectors of the government with useless or overlapping tasks, simplifying administrative requirements. Not only did almost nothing happen on these fronts, but competition in the downstream oil and the banking markets was wiped out; the state apparatus is even more bureaucratic and ineffective than before, with self contradicting and everchanging legislation and increased bureaucracy for non-tax evaders; and motorway concessionaires were given state aid to protect them from bankruptcy. And a failed renewables policy only added to energy costs.

2. Revamp taxation so as to affect both prices downwards and reduce income inequality that increases domestic demand at the demise of imports, and even increase tax revenues. On this front it was a complete failure with the exception of cars/hydrocarbons/alcohol. Indirect taxes went through the roof, even access to justice charges at the expense of democracy and contract enforcement; direct taxes were increased for the majority but reduced for the top earners; a new property tax had a dramatic negative wealth effect on consumption/GDP/government credibility, and actually reduced property taxes**.

3. Identify the sources of the problem and address these, not crush all. This is a eurozone wide problem hidden nicely behind the words economic crisis which does not identify the source of the problem. In Greece, the existence of the double deficit, despite an increase in tax earnings as a percentage of GDP between 2003 and 2009 without a big increase in business borrowings, clearly identifies the problem, the overspending greek state. And instead of what any individual would have done, cut expenses (and possibly default), the greek state preferred to enter their shareholders' houses and demand extra equity on a non stop basis, without downsizing at all except for maybe 10,000 jobs compared to 1,000,000 in the private sector. And the same for the banking sector, which after being dragged into the problem in 2009 and facing the declining economy, and for the sake of saving the banks or their creditors at the expense of the people, has already required infusions in excess of 20 bln, lending margins for healthy companies have gone up 800 basis points compared to the rest of Europe, while personnel has only been given soft landings and shareholders of the systemic banks kept whole.

Although having done the right thing would not suffice and some real adjustment would have taken place, it is clear that this could have been limited in the range of 10% and not 30%, keeping also the debt to GDP ratio at closer to 140% rather than 180%.

*This is often blamed on "greek statistics" yet all the data was there for anyone wishing to see it, including a big increase in greek debt costs in late 2008 onwards and a reduction in hodlings of greek debt by foreign funds. So the market knew it... the new government admitted the problem formally hoping that admitting it would restore confidence and borrowing.

** Ronald Reagan would have used this as an example: the new tax actually worked so as to reduce total tax receipts from property as transactions stopped and property prices plummeted, excluding secondary effects from the wealth effect.

Greek debt: Certain key factors affecting the magnitude of the required effective writeoff

The new Greek government has set a target of restructuring Greek sovereign debt so as to require only a 1.5% primary surplus for debt servicing, into infinity, plus a growth linked parameter. Various calculations are being made for what kind of interest rates and maturities are required in order to not call this a write off but a restructuring. One of these calculations estimates 70 years repayment with near 0% interest rates, inflation at 2% and growth at 2.5-3%.

These calculations fail to include some very important facts that need addressing:

1a. The need for a downward adjustment to the greek price level and hence nominal GDP to make up for lost competitiveness. The inflation differential between Greece and Germany/France is 20% and 17% respectively between 2001 and 2013. Otherwise every effort to reverse the long depression of the greek economy will only result into an external imbalance, the kind of imbalance that pauperization resolved from 2009 to 2014. It was internal real devaluation that the first troika programme requested, as an obvious way of restoring competitiveness, without a 30% drop in GDP, yet this failed as indirect tax hikes and high borrowing costs brought inflation instead of deflation. Going into growth results therefore that the current debt level is viewed as being 220%+ of GDP, not 180%.

1b. The 2% inflation rate on a European level is not on the horizon. It is closer to 0% and not likely to change soon as Europe has entered into a Japan 1990s mentality of only printing money but not truly reforming or improving competitiveness. But then there is the exchange rate...

2. Growth is not something that comes automatically nor can government spending bring growth when you want to keep a 1.5% surplus. Hence, how can growth be restored? This is where the program has suffered, it has been properly identified as a problem all over Europe and by the troika, yet no-one seems to have a clear answer. Nor can EU/EIB funds do it if the fundamentals for investing or working in Greece remain catastrophic; the result would be only white elephants, as one can see in Thrace. Attracting businesses by low taxes, the classic right wing recipee, works when this is done at the expense of the worker, only if you have a closed economy. In a country where emigration has been its main source of foreign exchange for 2 centuries and with completely open borders, if you do not tax the enterprise, you will need to tax the worker who will then emigrate. If you tax the business, it will also leave, except for anything land related. If you tax both business and worker beyond what the state offers back in return, then you have 2010-2014 Greece with high business and people emigration. Adding in an uncertain macro environment, corruption costs, and an uncertain blackmailing-friendly tax system without practical recourse to justice, growth cannot be restored. Addressing these fundamental issues shall be a precondition to growth, but these are not yet on the political horizon. And

3. Growth based on agriculture and tourism; these cannot be the only axes of development, as is the current plan. These are low tech low remuneration activities, and the brain drain shall continue if these remain the main axes, and nominal GDP/living standards will continue shrinking, despite, for technical reasons, real GDP appearing to grow. And so will taxes then...

Ultimately, it is the success on the internal front that shall determine to what extent a 50% or a 100% effective real debt forgiveness is required (hence a growth linked repayment is sensible). And it is independent of what other EU nations are willing to accept, it is more dependent on what will be done internally, as a declining economy* will inevitably lead to default.

*Note: 2014 is a one off stabilization of the Greek economy due to an increase of 20% in tourist arrivals, the rest of the economy continued its decline at a likely -3%; this is not possible to go on forever, just as demand for wheat eventually declined for post WW2 Argentina.

Μια εξαιρετική συνέντευξη για το θέμα χρέους και προγραμμάτων

http://www.kathimerini.gr/803719/article/proswpa/synentey3eis/k-ale3andrakh-prwtogenes-pleonasma-15-shmainei-koyrema


Θα ήθελα να επισημάνω τον - κατά την κρίση μου - κύριο λόγο αποτυχίας των μνημονίων:

– Τι πρέπει να περιλαμβάνει το πρόγραμμα διαρθρωτικών αλλαγών;

– Από την εμπειρία μου στο ΔΝΤ γνωρίζω ότι ένα πρόγραμμα, για να πετύχει, πρέπει να αποτελεί «ιδιοκτησία» της κυβέρνησης που το υπογράφει. Η κυβέρνηση πρέπει να παρουσιάσει τις δικές της προτάσεις. «Ιδιοκτησία», όμως, δεν σημαίνει ανατροπή των δύσκολων μέτρων για να μη χαθούν ψήφοι. Επίσης, δεν σημαίνει αδιαφορία για τους κανόνες που διέπουν τους διεθνείς οργανισμούς όπου μετέχει η Ελλάδα (επωφελώς) ή για τις πολιτικές ευαισθησίες άλλων κρατών-μελών.

Κονσταντίν Φιοντόροβιτς Γιουν: "Η Κωλοτούμπα". 1927 Λάδι σε καμβα, 132 x 191 cm.

Old cars'pictures from Paris expo