Understanding developments in the European crisis has become rather like Kremlinology, trying to figure out the meaning of subtle changes in wording, and rearrangements of the Politburo on the podium for May Day parades. In particular, Mario Draghi of the ECB goes back and forth, sometimes suggesting that the ECB will do what nearly everyone else can see is minimally necessary to the survival of the euro (namely, print lots of them, and use some to buy EU government debt, as was done by the Fed and the Bank of England). At other times, though, it’s as if Jean-Claude Trichet is doing a ventriloquist act.
In one respect, todays EU agreement was anything but subtle. The fact that the Eurozone countries and those aspiring to join them were prepared to go ahead without the UK (and a few others) suggests that they have something serious in mind. But what – the announcement is pretty much a restatement of the Growth and Stability pact, and under present circumstances, the deficit targets can only be seen as aspirational.
Applying one of the approaches that used to be standard in Kremlinology (not necessarily a reliable one, then or now) I’m going to assume that the EU leaders are acting with some sort of coherent goal in mind and work from there. In particular, I’m going to assume that everyone who matters now recognizes the need for a big monetary expansion and the use of newly created money to resolve, or at least stabilize, the debt crisis.
There are a bunch of obstacles to this:
(i) The desire of the ECB to save face, to avoid admitting its large share of responsibility for the crisis and, if it can, to hold on to its central position and to the inflation targeting system<
(ii) The belief of the German public (and some others) that they are being made to bail out a bunch of feckless Southerners, rather than (the reality) saving French and German banks from the consequences of their bad decisions, and preserving the European economy on which the Germans depend as much as anyone else from the disastrous regulatory failures of the Euro-elite, including the ECB, European Commission, financial regulators and so on
(iii) the problems with EU treaty amendments requiring unanimous consent
Obviously, problem (iii) is no longer an issue. From now on, eurozone economic policy will be made within the eurozone, through a still informal negotiating procedure. How this evolves remains to be seen, but there won’t be any effective national veto. And with the UK out of the picture, it’s unlikely there will be much room for carveouts or exemptions. Problem (ii) will take some time to fix, but Merkel can certainly sell the deal as a victory for Germany. Finally, it hardly seems possible that the EU leaders would have gone through this whole process unless they expected the ECB to play ball. And, the balance of power between the ECB and the national governments has changed pretty sharply. The old rules have been suspended, and there’s no reason to suppose that ECB independence would survive an intransigent refusal to move. The deal offers Draghi the chance to make a virtue of necessity.
Of course, given the history, it’s equally reasonable to suppose that the agreement has just kicked the can down the road, and that everyone will keep on doing as little as possible while austerity turns recession into depression.
And even if things work out well in the short term, there are big problems down the track in the failure to make room for a Keynesian fiscal policy. Even more serious is the democratic legitimacy crisis. Until now, it’s been more of a theoretical issue - people enjoyed grousing about various bits of the EU, but no one really cared. Now the big decisions that used to be made by national governments will be subject to a largely unaccountable central veto.<
{ 126 comments }
Kevin Donoghue 12.09.11 at 9:57 pm
“It hardly seems possible that the EU leaders would have gone through this whole process unless they expected the ECB to play ball.”
I’d like to think so. But Draghi’s performance reminds me of the “Lucy and the Football” meme popular with American bloggers. The ECB is not committed to anything. Ezra Klein made a good point about this: it suits Merkel rather well that she has the periphery by the balls, so why would she want to change the situation radically? Maybe she doesn’t want to let the crisis go to waste.
Watson Ladd 12.09.11 at 10:12 pm
With point (ii) I don’t get the distinction. The bank will need to be recapitalized, either by German taxpayers who repaid the loans or Greek ones who did not. The need to recapitalize the banks is different from how that burden will be divided. Also, it seems that communism is off the agenda, or even reviving the welfare state. Why?
bh 12.09.11 at 10:28 pm
Speaking of communication styles and historical precedents, there seems to be a common assumption that Draghi’s deliberately aping the Greenspan/Delphic Oracle style, where small changes in phraseology carry significant meaning.
I’m not sure that he is, though. It could be a lot simpler than that. If you read his supposedly activist statements the way we’d interpret normal language, they don’t sound very impressive. Maybe vague and noncommittal statements just reflect vague and noncommittal intentions. And you can contrast those with the much stronger tone of the Trichetisms.
Of course, I’m just guessing just like everyone else. Under the circumstances, John’s mostly-informed/mostly-coordinated actor model is as good a guess as any. I’m just not sure a completely-clueless/mostly-siloed* version fits any worse.
*Granting that there was a lot of choreography this week, so at a minimum France and Germany are trying to work together.
Sebastian 12.09.11 at 10:42 pm
“Applying one of the approaches that used to be standard in Kremlinology (not necessarily a reliable one, then or now) I’m going to assume that the EU leaders are acting with some sort of coherent goal in mind and work from there. ”
The fact that you call it Kremlinology reveals the problem–when the USSR fell apart, and the historical records became clearer, we saw that there was rarely a coherent goal. More often than not it was various heavy handed autocrats playing defense in their own domain. As much as I’d like to think there was some sort of secret plan, everything so far suggests that the ‘techno’crats, especially at the ECB have been burying their heads in the sand.
The most embarrassing fact from a technocratic point of view isn’t that they don’t seem to be able to carry out a plan, it is that they don’t seem to have one at all. We used to be worried that the technocrats would undemocratically ram through some foolish plan. Now it turns out they haven’t bothered with a plan at all. They just keep hewing to the “watch out for inflation ohhhhhh” line that they did through the ‘great moderation’.
On a mildly related topic, is it likely that the great moderation was really just storing up the severity of the fluctuations until a bigger collapse, or do economists think it was still an actual moderation?
gordon 12.09.11 at 11:25 pm
“Now the big decisions that used to be made by national governments will be subject to a largely unaccountable central veto”.
I see that Jeff Sparrow, in a Drum post, is also worried about the emerging threat to democracy in Europe:
http://www.abc.net.au/unleashed/3722272.html
I was glad to read Sparrow’s post because it reassured me that I wasn’t the only person getting anxious about it. It’s good to see Prof. Quiggin showing concern too. Now there are three of us.
MattF 12.09.11 at 11:26 pm
I wonder, though, after they erase the UK from the group portrait– will there still be the odd UK shoe or elbow that the eraser missed?
Mrs Tilton 12.10.11 at 12:37 am
it’s equally reasonable to suppose that the agreement has just kicked the can down the road, and that everyone will keep on doing as little as possible
Given that kicking cans down roads while doing as little as possible more or less defines Angela Merkel’s guiding political philosophy, why would one expect anything else out of any process with Germany in the driver’s seat?
William Timberman 12.10.11 at 1:08 am
Thank you, JQ, for attempting rationality in what increasingly resembles an obscure broom closet in Bedlam. Rest assured that when they find you and Paul Krugman (and the rest of the team) in there, Halliburton will be given a no-bid contract to wall it off and hang a portrait of Arthur Laffer where the door used to be.
As an American, I would find your clarity reassuring if I hadn’t been reading the British, German, and Italian press for the past year. (I can no longer stand to read my own country’s papers.) Perhaps I should be grateful that I can’t read Greek.
I think that the bottom line is this: if the ECB can manage to print lots of money while pretending that it isn’t, and if everyone in the EU leadership agrees to go along with the pretense, in a year or so, the democratic deficit won’t matter so much. If, instead, Merkel and Sarkozy simply redo the Stability Pact with jail terms for everybody who tries to buy groceries on credit, those of us outside the Euro zone should buy a lot of stock in the U.S. and Israeli companies that make rubber bullets — Brussels will need a lot of them, and presumably Germany will lend them the dollars to pay for them.
bobbyp 12.10.11 at 1:42 am
They are kicking the can down the road hoping for the ‘long run’ to bail them out.
Jawbone 12.10.11 at 2:01 am
Isn’t the real problem that large parts of the Greek and perhaps other Euro-zone economies are like a Soviet factory? Just shifting around cash-flows and imposing austerity isn’t addressing the real problem, which is one of low productivity.
mds 12.10.11 at 2:10 am
No.
bh 12.10.11 at 2:28 am
What MDS said. The economic crisis in the EU, like the one here, is one of collapsed demand. Productivity is fine, but even if it weren’t, it couldn’t possibly produce the situation we’re seeing now.
This is as close to a non-idealogical standard of quality as I can manage these days: if you can’t accept the existence of near-term, cyclical economic issues, then I can’t bother to listen to you. I’ve really run out of patience with people who insist on finding Deep Structural Issues (read: their pre-crisis prejudices) behind every fluctuation.
Jawbone 12.10.11 at 2:49 am
So Roubini is wrong? “People pretend that Greece’s problem is liquidity, but the problem is low productivity and absence of competition. Greece’s debt problem can be solved, but productivity and competition will be very hard to restore. Spain is even more problematic than Greece. It has very high unemployment, no competition, and extremely low productivity.”
Curmudgeon 12.10.11 at 3:43 am
Even after the UK departure, I’m skeptical that any negotiations involving national governments predisposed to represent their banking interests above all else can come up with any resolution that doesn’t reduce to “austerity now, austerity tomorrow, austerity forever.” The concept of demand has been so completely expunged from elite discourse as a result of decades of supply side voodoo that it is inconceivable for Europe to settle on anything that might actually work. That leaves only options that punish sinners in the name of ideological purity.
BillCinSD 12.10.11 at 4:19 am
“Also, it seems that communism is off the agenda, or even reviving the welfare state. Why?”
Because money doesn’t like hanging out with poor people
Glen Tomkins 12.10.11 at 4:48 am
I certainly share the hope that the leaders of Europe and the ECB are going to start behaving reasonably any day now. But if they intend to behave rationally, I would expect a change to rational speech to precede that change in behavior. I don’t think we’re seeing that yet.
The Kreminology on offer here is that because they have announced that they are about to do something, and that something must be really big because the UK split with them over whatever big thing it is, it must be that the big something they are planning is something rational. But if that’s the case, why are they not yet speaking reason? They’ve been speaking and doing rot so long it’s going to be a shock on all hands when they switch, so you’ld think they would have already started to prepare people for the shock by changing the talk as a first step.
The big changes they have in mind, if they are planning something big, are more probably big and wrong than big and right. I assume that these very smart people haven’t been getting it wrong because they are stupid. They are getting it wrong because they are committed to protecting the interests of people who would be hurt by getting it right. The deeper the crisis gets, the more the interests they have been protecting are threatened, and the less maneuver room they have to see clearly and act on that insight.
This series of financial crises is not going to end until and unless the govts involved decide that they are going to let a whole lot of excess wealth that they foolishly allowed to accumulate at the top burn off. It would have been smarter to have hoovered up this excess wealth on the front end, in the form of top marginal tax rates somewhere in the 90s. Then it could have been used to do good by funding public capital improvements. Now, on the back end, the only way to restore control is to let it burn itself off in the upcoming default crisis. But it has become so entangled with markets and counterparties important to the real economy, that the disentanglement is unlikely to proceed without quite a bit of collateral damage.
Josh G. 12.10.11 at 6:37 am
John Quiggin: “Understanding developments in the European crisis has become rather like Kremlinology”
Seems to me that this is at the core of the problems with the EU. The more democratic a system is, the less need there is of “kremlinology” to figure out what is going on. This kind of thing is extremely common with central banks (remember when people read meaning into Greenspan’s every word or gesture?) and is symptomatic of a fundamental lack of democratic legitimacy.
For years, the standard refrain was that the people would make a hash of monetary policy if allowed a say, so wise technocrats must be able to control it and be insulated from public accountability. But the people couldn’t possibly screw things up any worse than the elites have in the past couple of years.
bay of arizona 12.10.11 at 6:41 am
Jawbone 12.10.11 at 2:49 am
When you quote someone, usually you add a link. Greece does have problems with tax avoidance, but as PK says, it is Miami in the overall EU picture.
Including Spain in your list is blatantly misleading because devaluation would basically cure all their problems.
Jawbone 12.10.11 at 7:47 am
Sorry, here’s the link to the Roubini quote:
http://www.globes.co.il/serveen/globes/docview.asp?did=1000555811&fid=1725
Again, if the real issue is a poorly-productive economy then improving the tax structure or adjusting the exchange rate amounts to whistling past the graveyard. The problem, I fear, goes much deeper. bh in #12 warns against this sort of analysis but I think this avoidance is very damaging.
Chris Bertram 12.10.11 at 8:02 am
From inside the UK it is hard to know exactly what to think. Cameron and Sarkozy have engineered a fight to please their local nationalist constituencies and have both achieved what they want (for the short term). (I think Merkel would probably have preferred the UK to back a treaty- but this is great for Sarko.) One eurosceptic commentator remarked that the UK is now as isolated as a passenger who refused to get on the Titanic. I think that’s overstating it, but Cameron’s isolation is only really bad for the UK on the assumption that the 26 will achieve something workable rather than locking themselves into a deflationary spiral with endless sado-austerity for the PIIGS. Paradoxically, Cameron might – in the medium term – have made a more social-democratic politics possible for the UK. But the uncertainties really swamp my confidence in any of these guesses.
derrida derider 12.10.11 at 9:07 am
No, Jawbone, if you have low productivity due to poor microeconomic policies you can still avoid poor macroeconomic policies – it just means wages and employment are low, not necessarily unstable.
One way you can read the Greeks’ problems is indeed that they tried to avoid the living standard consequences of low productivity. But it is the way they attempted to live way beyond their means, not just the paucity of their means, that got them in to trouble. And it is poor institutional design that has ensured their trouble has spread to others.
Kevin Donoghue 12.10.11 at 9:46 am
Jawbone: “adjusting the exchange rate amounts to whistling past the graveyard.”
No it doesn’t and Roubini doesn’t say that it does. One of the basic messages of an introductory course on trade is that a “poorly-productive economy” can trade profitably if the price is right. Maybe you have a point of some sort, but it’s not apparent from your comments.
Henri Vieuxtemps 12.10.11 at 10:01 am
Roubini’s comments, if they are transcribed correctly, don’t make sense to me. In terms of productivity and competition there is no Greece or Spain, there is only the Euro Zone, economic zone with single currency and free unlimited movement of goods, services, and labor. What is he talking about?
Guido Nius 12.10.11 at 10:35 am
The anti-Merkel reading of what is happening in Europe is amazingly pre-dominant. Here there seems to be an odd convergence between left- and right-wing economists: that what counts first and foremost is monetary policy.
The fact of the matter is that the assessment of the situation has been clearly laid out and has been accepted by all of Europe (including in recent elections): fiscal convergence has to be settled first and once it has been settled the ‘normal’ way of handling such situations can be applied. Reversing the order will only lead to what was seen in Greece and Italy at the first go-around: adding to the historical woes that were built up mainly for a certain type of populist politicians to keep a hold on power.
The thing is that when you have over 100% debt and are adding to it at a rate of over 3% per year you are dependent on ‘the markets’. If anything is clear from the past year or so than this is it. A priority needs to be to regain independence from ‘the markets’ (a thing that is self-evident except to the UK because the UK apparently identifies with ‘the markets’).
Also, it was funny to see economists (i.e. technocrats) saying Friday morning that this was too little and that the markets would punish the politicians (i.e. the elected heads of state) for it and the same economists when debating Friday morning saying that the actual rise in the value of state paper that day was just because ‘ the markets’ decided to give us some time.
Sometimes I think there has to be a great London City conspiracy against the EU and the Euro.
Pete 12.10.11 at 10:43 am
“free unlimited movement of goods, services, and labor”
.. but not of public spending, which is unable to recycle the current-account deficits between the countries in the opposite direction.
Kevin Donoghue 12.10.11 at 10:51 am
@Henri Vieuxtemps
Not clear what your objection to Roubini’s comments is. To say “there is no Greece or Spain, there is only the Euro Zone” doesn’t make much sense. Greek debts are not EZ debts, obviously. Hence the problem. Like Jawbone, you may have a point but I’ve no idea what it is. More clarity please. This is not Heidegger we’re discussing.
Walt 12.10.11 at 11:47 am
Guido, the “anti-Merkel” view is the correct view. If Europe has settled around a different view, then that’s bad news for Europe, because they’ve settled on the wrong view. The fact that people have settled on this different view shows the power of preconceived notions to triumph over the evidence — essentially all of the historical evidence is on our side, while all the other side has is various moralistic narratives about debt.
Europe hasn’t quite settled on suicide — it’ll still be here ten years from now — but assuming that things work out and the eurozone doesn’t break apart violently, it is settling on policies that will lead to economic stagnation for another decade. Years of human potential are going to be wasted in the name of sound money. It’s a tragedy, and no less of a tragedy if the people vote for it.
Charrua 12.10.11 at 11:55 am
On a side note, the whole “debt as a % of GDP” idea is a very unusual thing, when you think about it. It’s certainly not the way people thinks or measures debt in their personal life or in business.
Guido Nius 12.10.11 at 11:55 am
‘The correct view,’ so this is exact science now. Then why complain about democracy at all? Why not just bring in the ‘right’ technocrats and deliver us from our own tendency to self-mutilation.
Your second paragraph is phrased in a way that the future Walt can interpret it as true, & this quite regardless of what actually happens. So, I’ll happily concede you will be proven to be correct, according to the standards you have set for yourself.
Walt 12.10.11 at 12:08 pm
No, if you want to fuck things up for yourself, that’s your right. It’s not an exact science, but the historical record is as clear on this as it is in anything. You don’t have evidence, you don’t have a theoretical mechanisn, all you have is some vague sense that debt is bad.
And your second paragraph is bullshit. If Europe follows your prescription, and has ten years of 4% growth, then I’m proven wrong.
Participating in these debates has (I think) given me a sense of what it must have been like to have been a non-American in the run up to the Iraq War. I remember quite clearly pro-war Americans making the “but the people agree with me, we live in a democracy” argument then too. How did that work out?
Henri Vieuxtemps 12.10.11 at 12:18 pm
Kevin, productivity is the number of units produced per worker per hour. How do Greek debts affect that? Capital, goods, and labor flow free within the Eurozone, labor/environmental laws are more or less unified, infrastructure is similar. If VW built a factory in Greece, would it require more workers to produce the same number of cars/month? Why?
And his ‘lack of competition’ statement is even more mystifying: is there some special inner-Greece competition? How can it be, what does it mean?
John Quiggin 12.10.11 at 12:21 pm
@Walt (27) Of course, the same is true of the US and UK, as regards fiscal austerity. The big difference with the eurozone has been to add contractionary monetary policy to the mix. If (big if!) my eurokremlinology is right, that difference will soon go away, leaving almost the whole of the OECD in the same bad state.
Guido Nius 12.10.11 at 12:51 pm
No Walt, debt is not bad. Too much debt is bad. It is bad because it makes you dependent on people financing your debt. These people are on average wealthy people and will push you to policies in favor of their wealth in return for them continuing to finance your debt (see Cameron’s stance).
Continental Europen social security wasn’t built on debt but it is now threatened by debt. This is quite clear from the evidence. I prefer long term social security even to ten-years periods of economic growth but that is probably because at heart I am truly outdated. If in 10 years our social security will be better than it is now (which is much worse than it was 30 years ago before the Anglo-Saxon model hit us) that would be a fine achievement in my book.
Walt 12.10.11 at 12:52 pm
I think the euro-zone is stuck pursuing greater fiscal austerity, just because it’ll be hard for them to borrow at the risk-free rate, the way the US and the UK can. And do you think the ECB will be as aggressive as the BoE?
Walt 12.10.11 at 1:12 pm
Whose program do you think you’re getting, Guido? The Merkel plan is Cameron’s stance. Most countries are going to have to cut back their social welfare spending in order to make bond-holders happy. Maybe Germany or the Netherlands won’t have to cut back, but France and Italy will.
Honestly, I think long-term prospects don’t look too good for the welfare state in Europe. Europe is getting older, and the time to invest for the future is now. But instead of investing for the future, the Merkel plan is that Europe should sit on its ass for ten years until some numbers on paper look better. Economic growth is cumulative, so Europe will be around 25% poorer than it would have been otherwise, and supporting the same number of people. In ten years, right-wing politicians will regretfully inform that Europe can no longer “afford” the welfare state, and proceed to cut what’s left.
dsquared 12.10.11 at 1:20 pm
I would redistribute the emphasis in ii)
(ii) The belief of the German public (and some others) that they are being made to bail out a bunch of feckless Southerners, rather than (the reality) saving French and German banks from the consequences of their bad decisions, and preserving the European economy on which the Germans depend as much as anyone else from the disastrous regulatory failures of the Euro-elite
First, the German public are correct in their belief that they are being made to bail out Southern Europe and Ireland. The money is being taken from them, and it is going to end up being given to the peripherals. When I talk to Germans, they’re actually just as outraged at giving fiscal transfers to Ireland (which is a rich country).
On the second, I keep saying this and nobody believe me but the EBA publishes really good statistics about bank lending within Europe and it is very clear that the peripheral bailout is not about protecting the French and German banks. The banks have a separate problem about the danger of a systemic liquidity crisis, but that’s not a result of bad decisions they made in the past; it’s a combination of the crisis reaching Italy and the ECB refusing to provide sufficient liquidity to the market. And this problem was actually most likely solved on Thursday when Draghi changed the liquidity-providing operations.
The third is the big issue. Germany knows that its long term interests are in keeping the euro together. So it knows it will end up paying the bill. It just wants to get the maximum control over how the money is spent – since it isn’t providing the UK with any money, I don’t think it ever hoped to get any control.
Also, I don’t see why you wrote:
And even if things work out well in the short term, there are big problems down the track in the failure to make room for a Keynesian fiscal policy
Isn’t “zero structural deficit” basically the exact “hard Keynesian” policy that you and Henry recommended?
Kevin Donoghue 12.10.11 at 1:27 pm
Henri Vieuxtemps: “If VW built a factory in Greece, would it require more workers to produce the same number of cars/month?â€
It certainly would if the workers are less skilled, or less disciplined, obviously; while I haven’t looked at the data I’d be surprised if that’s not the case. I sometimes get pissed off with people singing the praises of German workers, but let’s not pretend they got their reputation just because journalists bought into some Nordic myths. Of course if you have evidence that Roubini is simply wrong by all means share it, but he’s not saying anything very startling.
Kevin Donoghue 12.10.11 at 1:38 pm
dsquared: Isn’t “zero structural deficit†basically the exact “hard Keynesian†policy that you and Henry recommended?
The relevant rule reads:
I’m struggling to figure out what that will mean in practice. I don’t think anyone knows. It certainly looks like it could preclude a strong stimulus at a time when nominal GDP is severely depressed. Maybe it will be interpreted leniently, maybe not.
Henri Vieuxtemps 12.10.11 at 1:48 pm
First of all, Roubini certainly can be wrong, just like everybody else. Second, while the link to an Israeli website above (19), does put some words in quotation marks, we don’t really know if these are exact Roubini quotes and in what context.
Fine, let’s accept, for the sake of argument, that native Greeks are lazy bastards, and hardworking Germans will not migrate to Greece. Yes, that certainly would be a problem for Greece, although it’s not clear what can be done to rectify it. Fine. But what about the statement, attributed to Roubini, in the piece that “[Spain] has … no competition”? What’s that supposed to mean?
Guido Nius 12.10.11 at 1:50 pm
Wow, does this come from Keynes? That is more or less exactly what Merkel wants to be engraved constitutionally. I always thought it was a bit restrictive but the operative word would probably be ‘structural’ i.e. years like 2008-2011 would be years for leniency. But there would be less opportunity for leniency if on top of a deficit you have a rate of debt in excess of 60% (which is currently rather more a norm than an exception).
Kevin Donoghue 12.10.11 at 2:04 pm
Henri, okay I see you have a point. Obviously the quotes are a bit garbled. Best I can suggest: for ‘no competition’ read ‘poor competitiveness’. Or better yet, dig out articles written by Roubini rather than a reporter.
Kevin Donoghue 12.10.11 at 2:10 pm
Paul Krugman and Kevin O’Rourke flatly disagree with dsquared. Pass the popcorn.
P O'Neill 12.10.11 at 2:21 pm
#38
It’s not clear to me if they intend a UK style Golden Rule where the structural deficit can finance public capital spending.
But anyway, that UK-style Golden Rule, which is more or less what they’re aiming at, worked out great for the UK, didn’t it?
Henri Vieuxtemps 12.10.11 at 2:22 pm
I read a few articles written by Roubini, a couple of years ago. Far as remember, they were mostly about Roubini, how smart he is.
John Quiggin 12.10.11 at 2:23 pm
“Isn’t “zero structural deficit†basically the exact “hard Keynesian†policy that you and Henry recommended?”
I must admit, I had missed “structural” which at least potentially allows for automatic stabilizers. But hard Keynesian policy would allow fiscal stimulus during slumps, which (on the standard measures) adds to the structural deficit.
The important issue right now is how much this is interpreted as an agreement on short-run austerity, rather than as a commitment to a centralised push for long-run fiscal sustainability. As with Kremlinology, we are reduced to parsing the words, and guessing what this means for the ECB.
John Quiggin 12.10.11 at 3:57 pm
@DD “The money is being taken from them, and it is going to end up being given to the peripherals”
It’s going to start out being given to the peripherals and end up being handed over to the bondholders. As usual in bailouts, the peripherals are getting a deal that is only marginally better than what they could take for themselves by defaulting. Until the Greek haircut, the bondholders were getting 100 cents in the euro.
But I agree that the primary emphasis should be on regulatory failure.
dsquared 12.10.11 at 4:48 pm
As usual in bailouts, the peripherals are getting a deal that is only marginally better than what they could take for themselves by defaulting
I don’t see this – if Greece or Ireland defaulted, they’d have to run primary surplus, which would be unimaginable. The Greek and Irish bailouts are mainly financing the difference between the kind of austerity policies being implemented, and something like what postwar Germany experienced
Walt 12.10.11 at 5:03 pm
That’s if they default and don’t quit the euro zone. If they quit the euro zone, the calculus changes considerably. (Greece could probably get away with quitting the euro zone. Ireland is less clear, since quitting might drive the multinationals out.)
The German brinksmanship in getting better terms has got to be one of the great negotiating failures of our time. While trying to get better terms out of Greece they let a localized crisis turn into a general panic about European sovereign debt. The longer they wait, the more money it’s going to cost them to save the eurozone.
Sebastian H 12.10.11 at 5:04 pm
But for Italy and Spain, primary surplus is within reach, right? So either/or both could do just as well with default if the Germans work too hard to box them in, right? And by making the rules harsh for Ireland/Greece, the Germans risk forcing Italy/Spain out of the Euro unless the ECB is willing to allow some real inflation (and at this point it doesn’t even seem to be willing to work up to its alleged target if it falls short).
You can dance the argument about Greece and Ireland, but you can’t around Italy and Spain. And the whole freaking problem with the EU is that it tries to have the exact same policies for Greece, Ireland, Italy, Spain and Germany.
dsquared 12.10.11 at 6:20 pm
But for Italy and Spain, primary surplus is within reach, right?
right. Italy actually has one now.
So either/or both could do just as well with default if the Germans work too hard to box them in, right?
Wrong. Default really isn’t costless. Most Italian debt is held by Italians. The resulting capital controls would be very tough indeed on Italian and Spanish industry – basically these aren’t third world resources-and-aid economies, they’re major trading and manufacturing nations.
For Ireland and Greece leaving the euro, we also have to remember that having your domestic banking system implode isn’t just a matter of sticking it to those awful banksters and their locust-like creditors. There are negative effects too. The idea that all those foreign companies would still want to be headquartered and based in a failed state that wasn’t in the euro zone is unlikely in Ireland; Greece might do a bit better from massive devaluation, but it would have to be absolutely massive (and have really serious effects on imported goods, which Greece does consume) to get them anywhere near primary surplus.
Argentina is the unusual case, and it’s got a lot more to do with YPF than anything else. Greece and Ireland aren’t going to strike oil.
P O'Neill 12.10.11 at 7:36 pm
Greece and Ireland aren’t going to strike oil.
Funny you mention that, because while Bertie Ahern as Taoiseach was spending like in an oil windfall country (it was actually a property tax windfall), he had in 1992 as Finance Minister given away most of the revenue flow that would come from any actual oil or gas. So even if it’s found, it won’t make much difference.
Jawbone 12.10.11 at 9:37 pm
@Kevin D #22
Thanks for that point–that’s right, and I was overlooking it-low productivity isn’t probably part of the cause of Greek problems.
But I suppose my point is that in addition to to austerity or transfer payments/bailouts, attention should be given as well to inducing productivity improvements in Greece–through changes in, e.g., industrial policy, labor markets, etc.
Jawbone 12.10.11 at 9:55 pm
To elaborate on the previous point, I take it that when Roubini calls Greece and Spain “low productivity” he means they are lower than they should be with some relatively achievable changes. By “no competition” I assume he is referring to a lack of competition in (public and private) labor markets and to non-tariff barriers in other markets. If Greece could improve productivity then it could handle its current level of debt.
Henri Vieuxtemps 12.10.11 at 10:18 pm
How could any of this possibly have anything to do with productivity? You know where productivity is really low, much much lower than Greece? China.
Jawbone 12.10.11 at 10:33 pm
Well, typically low-productivity countries aren’t *offered* that much debt. Greece, because its EuroZone membership was read as including an implicit German guarantee, was able to borrow a lot. So, now there only seem to be three options if Greece is to remain in the EuroZone– Greek austerity (painful and not clear that it’s politically sustainable), German-funded bailout and/or ongoing transfer payments (this may happen, though its political sustainability in Germany is in question) or (seemingly more attractive than the first two)–improve Greek productivity so that it can handle its current debt-load.
Here’s the European Commission on Greek productivity:
Greece still suffers from low productivity, mainly due to 1) underdeveloped or not up to date systems for science, technology and innovation, 2) quality level of human resources and availability of skilled workforce, and 3) a low level of entrepreneurship. Productivity is a key factor determining a sustainable long run growth.
http://ec.europa.eu/regional_policy/sources/docgener/panorama/pano8_en.htm
Henri Vieuxtemps 12.10.11 at 10:46 pm
The quote is “Productivity is a key factor determining a sustainable long run growth which at the same time provides the conditions for improved living standards.”
The standard of living certainly does depend on productivity; the rest is bullshit.
ScentOfViolets 12.11.11 at 4:07 am
This doesn’t comport with what I’ve heard, or what at least what I understand people like Krugman to be saying.
But let’s work on this. When you say that “First, the German public are correct in their belief that they are being made to bail out Southern Europe and Ireland. “, just what are they bailing Southern Europe and Ireland out of? That is, to whom does Greece et. al. actually owe money? Who actually holds that debt?
ScentOfViolets 12.11.11 at 4:17 am
Oh, maybe I should quote one of Krugman’s pieces as well:
Maybe I’m misreading, but it sure seems like Krugman at least thinks that part of the problem is that the usual suspects are attempting to shield German banks from any losses. Am I wrong in this? Or are you saying that Krugman himself is wrong?
Lemuel Pitkin 12.11.11 at 5:34 am
– if Greece or Ireland defaulted, they’d have to run primary surplus
And now we are in 2+2=5 territory. In the worst case, a government that is cut off from the credit markets, completely and forever, need only maintain a primary balance.
And of course the consequences of a real world default are never that absolute. It’s even quite plausible that if default reduces debt to a manageable level, a government post-default might be able to borrow on more favorable terms than before. Bondholders, whatever their bluster, have to focus on repayment prospects in the future, not revenge for past wrongs. I think I read something by Daniel Davies to this effect once.
I’d be really happy if the best explanation for dsquared’s recent interventions here weren’t so clearly that he’s realized what side he’s on.
Curmudgeon 12.11.11 at 5:37 am
Primarily German banks.
It’s not too hyperbolic to describe German-funded bailouts of the Euro-periphery as schemes to launder German public money into the hands of German banks
Sebastian H 12.11.11 at 7:33 am
“Wrong. Default really isn’t costless. Most Italian debt is held by Italians. The resulting capital controls would be very tough indeed on Italian and Spanish industry – basically these aren’t third world resources-and-aid economies, they’re major trading and manufacturing nations.”
I don’t think anyone is saying default is costless. The problem is that many of the costs seem to be approximately the same whether or not they default if anything approximating the most recent seven or eight German ‘plans’ were enacted. If there is default and exit from the euro, they can at least get the benefit of devalued currency. That isn’t available to them so long as they are under the euro. So long as the ECB targets rates toward what makes Germany better off, rather than an approximation of what makes other countries in Europe better off, they are forced to deal with many of the problems they would be experiencing under default with the additional problem of having a too-strong currency to be competitive. Greece can’t do anything about that. But any country that is near a primary budget surplus has a choice.
Kevin Donoghue 12.11.11 at 9:43 am
I’d be really happy if the best explanation for dsquared’s recent interventions here weren’t so clearly that he’s realized what side he’s on.
Well, you could search for another hypothesis. I’ve noticed that dsquared’s more vituperative comments about the rich, undeserving Irish have a tendency to coincide with encounters between Irish and Welsh rugby players. He could be posting from a pub at a time of high emotion. Beware the economist’s trap of having an irrational passion for seeing dispassionate rationality everywhere. (Not sure who I lifted that from; sounds like Kenneth Boulding.)
Walt 12.11.11 at 10:07 am
I don’t see the point in speculating about dsquared’s motives. Even if he’s gone totally evil, it’s unlikely that when confronted he’ll reveal his evil plan. He’s not the Joker, after all. I don’t think.
Kevin Donoghue 12.11.11 at 10:29 am
But Walt, you probably don’t see the point of 30 brawny men risking serious injury for the possession of a ball. Not everyone is like you.
Kevin Donoghue 12.11.11 at 10:59 am
But admittedly it’s the motives of Merkozy we should be speculating about, not those of dsquared. For now I stand by my first comment. I think German policy-makers want to make Italy more like Germany. The crisis is giving them the leverage to do so. The misery in the bond market and the labour market is just a symptom that the medicine is nasty. That doesn’t mean it won’t have the desired effect.
Henri Vieuxtemps 12.11.11 at 11:10 am
@61
“Default really isn’t costless. Most Italian debt is held by Italians. The resulting capital controls would be very tough indeed on Italian and Spanish industry”
What “resulting capital controls”, what does it mean, exactly? For one thing, they are bondholders, coupon clippers, not capitalists.
…the benefit of devalued currency…
It doesn’t seem fair to count bondholders getting a haircut as a cost, and currency devaluation as a benefit. Currency devaluation makes pretty much everybody in the country poorer.
dsquared 12.11.11 at 11:35 am
Sebastian: (btw, SoV and Lemuel, you are both pre-emptively banned from any of my threads in future)
The problem is that many of the costs seem to be approximately the same whether or not they default if anything approximating the most recent seven or eight German ‘plans’ were enacted.
What estimates are you working on here? Lots of people seem to say this, but I’ve not seen anyone at all do the work on estimating the likely cost of default. All I’ve seen is Paul Krugman (yes by the way, he is flat out wrong about German bank exposure) printing that graph of Argentinian GDP and conspicuously not printing one of Indonesia.
If there is default and exit from the euro, they can at least get the benefit of devalued currency. That isn’t available to them so long as they are under the euro.
Henri above has a good point – devaluation isn’t a panacea either. It tends to benefit producers in the traded sector and impose costs on people who aren’t in the traded sector. Like teachers, pensioners, etc.
So long as the ECB targets rates toward what makes Germany better off, rather than an approximation of what makes other countries in Europe better off,
The whole debate could do without this sort of borderline conspiracy theory. If the ECB was setting rates for Germany, they’d be at least a per cent higher. The ECB sets rates for the Eurozone as a whole. In which calculation, Germany and France do have a greater weight compared to Greece and Ireland, because they’re bigger. Which is indeed a problem for small economies with a different cyclical position, but the Optimal Currency Area argument doesn’t benefit from a nationalist spin.
they are forced to deal with many of the problems they would be experiencing under default with the additional problem of having a too-strong currency to be competitive.
This is true, and it’s a good reason why there ought to be a mechanism for financing these countries’ countercyclical policies, and ensuring that financial market cycles in the value of their government debt don’t amplify the real economy effects (btw, this would also involve taxing the next Celtic Tiger or Spanish boom for the benefit of the Ruhr rustbelt). But that’s what the Eurozone is trying to do!
Henri:
What “resulting capital controlsâ€, what does it mean, exactly?
If a country defaults and leaves the euro, it is presumably doing so in order to gain the GDP benefits of higher net exports and a current account surplus. But the current account surplus can easily be swamped by capital flight overseas as the domestic middle class struggle to preserve their wealth (massively important in Italy, which is a very high-savings economy).
So, default and devaluation usually go hand in hand with capital controls. But these are amazingly inconvenient for domestic industry; it also makes it very difficult for them to import raw materials and capital goods. Russia and Argentina, you’ll note, have as their biggest export earners some large, mainly state-controlled hydrocarbon and agricultural monopolies. For Italy and even Greece, it would be much more damaging.
All this compares to the current level of austerity, which is to say the kind of austerity you go through if you have a big, hundreds of billions of euro-big soft rate loan and the ECB intervening in your government bond market. As I say, I don’t think anyone’s really done the cost-benefit analysis and published it, but I bet the Italians, Greeks, Irish etc have done and I bet the calculations don’t even nearly stack up.
I’m “on the side” (btw, what a tool) of sensible, evidence-based technocratic policy. That’s very different for an OECD manufacturing and trading economy which is an EU member and benefits from the EFSF, than for a developing country. Because Greece isn’t very like Argentina.
ScentOfViolets 12.11.11 at 11:44 am
Chuckle. Just what was it that got me “pre-emptively banned”? Was it this:
Or perhaps it was this:
Or maybe it was because I had the temerity to actually quote Krugman:
I think I can justifiably say at this point that Daniel, you’ve exhausted any remaining respect I have for you – either intellectually or ethically. And – dare I say it – you definitely owe me an apology. Big time.
FromGreece 12.11.11 at 11:49 am
It is pretty clear that only a very small part of the loans Greece has been getting in the past two years is going towards financing our current deficit. It is an extremely crucial part, because without it people would go without a pension or a (meager) salary, but it’s a small part.
The ownership of greek debt by this point is pretty clear: Greek banks (more than the rest), German banks, French banks. And increasingly supranationals, mostly ECB but also EU countries and the IMF.
John Quiggin 12.11.11 at 12:01 pm
SoV, I’m also banning you, and I anticipate a sitewide ban in the near future. You’re more trouble than your comments are worth.
ScentOfViolets 12.11.11 at 12:35 pm
Sigh. The fact is, John, you know Daniel is behaving unreasonably, and equally, you know that I’ve said nothing that was either a) unfactual, or b) in an uncivil tone. In fact, I’ve just quoted all that I’ve said here in one post. I’m also guessing that not only will you refuse to agree; you’ll also refuse to point out just exactly where you think went I over the line. Solidarity, doncha know.
Much more important than the actual facts at hand.
Henri Vieuxtemps 12.11.11 at 12:37 pm
I don’t know anything, but logically, if, say, Italy defaults and sticks with the euro, then there seems to be no reason for a capital flight: Italian Euro is the same as a German one.
So, capital flight seems to be a consequence not of a default, but of devaluation (in the cases of Russia and Argentina). If the ruble that was worth 20c yesterday is only 5c today, and going down to 3c tomorrow, that’s certainly a perfect reason to sell and convert to dollars. But then, as things settle down and labor costs drop, capital, presumably, will flow right back. That’s the whole point of devaluation.
hix 12.11.11 at 12:48 pm
“Primarily German banks.”
Source? Thats just not true.
bob mcmanus 12.11.11 at 12:52 pm
Can I take back the “Habermasian” part? It was inaccurate and unfair.
Guido Nius 12.11.11 at 1:14 pm
Going back to the original post, there is something unsettling in the want to see decisive, swift and radical solutions. The problem has been built up over 30 years so it would seem that 3 years to solve it in a structural way would be pretty much OK. Impatience is, imho, more and more becoming an issue in and of itself.
Another thing that strikes me is that sometimes the discussion assumes that austerity is a new phenomenon. At least in Belgium, from the late 80’s all governments – except maybe those of the beginning of the century – were austerity governments. At first this was to get into the Euro and out of our addiction to devaluations (which, after a couple of them, clearly emerged as not exactly the most social of solutions) and afterward to comply with the Maastricht treaty. The latter may have been stupid given what others did but as a country we didn’t fare too badly with it (until 2008 when somebody else’s debt caught up with us), including as far as economic growth goes.
All of this is evidence as well and at first glance more pertinent than evidence from the other side of the globe.
The key thing will be to form a public institution that can effectively organize a level playing field for capital markets instead of the latter de facto organizing the former. In Brussels the other day that was quite openly the discussion point between Cameron & the rest.
FromGreece 12.11.11 at 1:26 pm
“SoV, I’m also banning you” None of my business of course, as I’m new to the forum, but it’s unclear what would prompt this. I’ve seen my fair share of trolls, louts and all around polluting commenters and SoV doesn’t seem to be any of those.
I guess the main reason for this comment is to understand the rules a bit better so as not to run afoul of them without realizing it…
FromGreece 12.11.11 at 1:29 pm
“Going back to the original post, there is something unsettling in the want to see decisive, swift and radical solutions. The problem has been built up over 30 years ”
Which problem has been built up over 30 years? The current problems of Spain are due to the last two-three years. Same with Ireland: The banks went crazy for a few years, and in the last few years Ireland has a problem due to that (and not much else).
The notion that this crisis is fundamentally structural is not corroborated by facts. Not all of the EU is Greece. Moreover, it’s funny how the same voices from the right that are moralizing now were lionizing the policies of the states under fire until a few years ago (Ireland anyone?)
Watson Ladd 12.11.11 at 1:40 pm
So I’m not so sure about Henri’s belief that default in a common currency is not disastrous. While a country with a small amount of debt might conceivably default without harm to the common currency, Italy, Greece and Spain have very large outstanding debts. Losing money on those would force German banks etc to sell off assets denominated in Euros, as well as foreign investors leaving the Eurozone assets. That could drive down the value of the Euro to a point where leaving it makes sense to avoid further losses. But as I write this chain of events I realize that there is a gap between an asset selloff and the currency breaking up. Would JQ or anyone who knows about economics care to comment upon this?
John Quiggin 12.11.11 at 1:50 pm
@FromGreece 76: My ban isn’t in response to anything in this thread. SoV has long been a disruptive commenter, and I had already decided a ban was warranted (as have others). The occasion just came up a little sooner than I expected.
I understand that you are new and seeking guidance rather than second-guessing my ban. To be clear to all commenters, though, decisions of this kind are at our sole discretion, and debates over such decisions are not an acceptable use of the comments threads. Commenters who think they have been hard done by can send politely worded emails asking for a review.
Guido Nius 12.11.11 at 1:51 pm
I do hope I am not a voice from the right. Greece, Italy, Belgium are clearly distinct from Ireland. Spain is probably a mixed bag but having lived in Spain 10 years ago for a couple of years I don’t think it can be said that Spain’s problems are due to the last three years.
Putting Ireland to the side (as Iceland it was just a neo-liberal haven preying on solidarity from the rest), the structural problem is that debt was, after the oil crisis, used as the way out of anything. The result of that is that at this point in time – where debt could actually be a good way out of a problem created by bankers – the escape valve is blocked.
We’ll just have to deal with that. If we allow us to be divided capital will rule even more – and if we go for devaluation it will be the less well off that will have the least means to escape the consequences. There is wealth enough in Europe maybe it is time to focus on distributing it more fairly instead of on knee-jerk reactions to increase it further. A good start would be to tax labour less and capital more, but this can only be done when it is done together (Ireland anyone?).
Henri Vieuxtemps 12.11.11 at 1:56 pm
I kind of suspect that driving down the value of the Euro has been the main goal of the European Politburo in the last couple of years. Suppose some months ago they took a decisive step (of some kind) and stabilized their currency once and for all. Where would the EURUSD rate stand now: 1.9, 2.0, 2.5? Do they want that? A perpetual crisis is good for them, it’s a good strategy.
niamh 12.11.11 at 2:32 pm
John, I love the idea of doing Kremlinology on EU decision-making , but as Sebastian at #4 noted, this isn’t actually a very encouraging trope for inner coherence and purpose.
The recent Eurointelligence headline said it all in my view: ‘EU agrees comprehensive solution: No Treaty, no ECB Big Bazooka, no ESM bank licence, no increase in ESM size’ (9 December).
The deal so far is a beefed-up Stability and Growth Pact – more of the same, with the same built-in deflationary bias. This is not only because fiscal discipline is the instinctive policy preference of the German policy community, but also because the ‘core’ economies can see what’s involved in taking on extended lending responsibilities (and a ‘bail-out’ is a loan, not a gift). And this is before we even talk about the kind of transfers that would be required by a proper fiscal union.
The problem is that there are too many vectors of national and institutional policy preference cutting across each other. The clash of national preferences is pushing decision-making outside established legal frameworks. Von Rompuy (for the European Council) wanted a quick fix, not a Treaty change. Barroso (for the European Commission) had been pressing for some form of common debt issuance. None of this really points to any kind of coherent strategy.
There is a kind of weird step-wise institutional logic at work on the part of the central bankers: the hard-core members of the ECB insist upon stronger fiscal disciplines to avert the risk of moral hazard. They might then perhaps be more willing to take on the role of ‘lender of last resort’ for sovereign debt. (There is already greatly increased liquidity provision for the banking sector). Hence Draghi’s half-hints.
But getting these guarantees, however necessary, is a medium-term project, fraught with political difficulties. What we need is an immediate life-raft and a strong vision about what the long-term plan will look like.
Meanwhile the ECB has put a lid on the weekly volume of government bonds they’re willing to buy. This is an open invitation to the markets to have a further go, with all the attendant hazards of ratings downgrades for existing EFSF guarantors. Instead of doing what could and should be done to pre-empt case-by-case market attacks, once again the political response falls short of what is needed.
The whole package is still defined in terms of fiscal stabilization, where what we have now is both a European banking sector crisis and a crisis of sovereign debt: the ‘German’ policy community view, widely shared across the ‘northern’ bloc of the Eurozone.
There is no appetite for generating growth capacity other than through the ‘orthodox’ measures of cost-cutting and structural reforms.
There is no political agent capable of taking an ‘encompassing’ view of Europe-wide economic performance – for all the quasi-democratic moves to strengthen the European parliament, this is not the level at which political accountability works.
It still isn’t clear whether Ireland will need to have a constitutional referendum to comply with fiscal oversight requirements. If it does, the crushing burden to taxpayers of rescuing the banks, already the cause of huge impotent fury, would have to be a key issue. But more generally, Irish voters are horribly aware that there will be no domestic improvement without Europe-wide growth. If there is no real plan for recovery alongside the tougher compliance and oversight requirements, it isn’t hard to see how alienation from the whole European project could spread very quickly.
(Apologies for the length of this comment, but I logged on with the intention of starting a thread on the subject, and found John’s note and the interesting discussion it’s started).
dsquared 12.11.11 at 2:44 pm
there is something unsettling in the want to see decisive, swift and radical solutions. The problem has been built up over 30 years so it would seem that 3 years to solve it in a structural way would be pretty much OK. Impatience is, imho, more and more becoming an issue in and of itself.
Yes, this, very much so.
I think Niamh is right here – basically what we are seeing here is a takeover of Europe by the neoliberal “permanent government” who failed to get their way by democratic means. All of the nationalism and anti-German sentiment is a distraction from the real scandal here. The ‘technocrats’ (which is apparently what they want to be called, although frankly I am seeing a lot of ideology and not much technical ability) want to reorganise the whole of Europe on neoliberal lines (ironically, to basically replicate the Irish economic transformation; Mario Monti has a lot more in common with Charles McCreevy than with Angela Merkel).
Just to add to John’s point, it was indeed apparent, from a great deal of his posting, that SoV had no respect for me, intellectually or ethically. That is, I suppose, his right, but it isn’t consistent with continuing to post comments.
dsquared 12.11.11 at 2:48 pm
@72: yes, default while remaining within the euro is potentially constructive, which is why it’s the plan for Greece. It does destroy a lot of domestic wealth though, which is why it’s not being seriously considered for Italy or Spain. In the case of Ireland, since the problem debt is all in the banking system, the debate is between people who think that having the Irish banks go bankrupt would be no biggie, and those who think it probably would. Since the explosion of the Irish banking system would have fairly significant knock-on effects to the rest of Europe, these are taken into account by the rest of the Eurozone when discussing support packages with Ireland, something which for some reason is considered to be appallingly unethical and tantamount to fascism by the Sunday Independent.
Kevin Donoghue 12.11.11 at 3:20 pm
dsquared: In the case of Ireland, since the problem debt is all in the banking system, the debate is between people who think that having the Irish banks go bankrupt would be no biggie, and those who think it probably would.
Karl Whelan presents the issue a little more fairly I think.
Lemuel Pitkin 12.11.11 at 3:31 pm
basically what we are seeing here is a takeover of Europe by the neoliberal “permanent government†who failed to get their way by democratic means.
For whatever it’s worth, I think this is exactly right. One might then ask, who does the permanent government represent?
bobbyp 12.11.11 at 3:39 pm
dsq’d,
I’m not sure what you mean by “default while remaining within the Euro”. How is that done? A Greek default could be taken off the table quite easily if the ECB acted as a true central bank. Under the current rules, it cannot. The Germans like it that way. They are not ‘bailing out’ anybody. They persist in maintaining their export hegemon, and yet refuse to understand that if you insist on having a positive trade balance, somebody has to pay for it.
Watson Ladd 12.11.11 at 3:56 pm
bobbyp, the same way a California bankruptcy would not affect the dollar. Greece simply refuses to pay.
dsquared 12.11.11 at 4:07 pm
A Greek default could be taken off the table quite easily if the ECB acted as a true central bank.
No I don’t think it could, although an Italian one certainly could. Greece’s debt burden is basically the result of a decade of ignoring the fact that the price of maintaining social peace with generous state payouts is that you have to do something about the tax compliance problem. The debt needs to be rebased downward, and then yes, Greece does need someone to take the tough decisions about tax collection.
Kevin: I don’t usually disagree with Karl all that much, but I think that it’s just wrong to talk about the Irish state liability for the banking system without mentioning the corresponding asset. At face value, NAMA is worth EUR72bn, which is about EUR16,000 “for every Irish man, woman and child”. Even at a 50% loss rate, this makes a big difference to the ELA liability. A lot of contemporary Irish commentary on the banking crisis really does seem to treat the banking sector crisis as if it was nothing to do with the real estate bubble; you can see how the Germans and French aren’t really very keen on the idea that “the housing wealth is ours, and the mortgage debt is negotiable”.
Kevin Donoghue 12.11.11 at 4:38 pm
dsquared: I’d be very amenable to a deal which involved selling NAMA to the EU.
dsquared 12.11.11 at 4:43 pm
I think that is eventually what’s going to happen.
John Quiggin 12.11.11 at 4:53 pm
Re: “a takeover of Europe by the neoliberal “permanent government†” and the idea of remaking Europe in the image of Germany
It’s important to remember that this had already been achieved, in appearance at least, until the financial crisis. The ECB, essentially the Bundesbank writ large, embodied the permanent government as far as macroeconomic policy was concerned, and the European Commission did so in other respects.
What we are seeing is not so much a takeover of a system that was previously outside neoliberal control . Rather it’s an attempt to retain control in the face of the failure of the ECB, Basel 2 and other key elements of the neoliberal project.
P O'Neill 12.11.11 at 5:07 pm
The Anglo ELA is not a counterpart to anything on NAMA’s balance sheet. Even if NAMA was dumped entirely to the EU, there is still a big pile of government promises to make hole creditors of insolvent banks.
Sebastian H 12.11.11 at 5:45 pm
“Henri above has a good point – devaluation isn’t a panacea either. It tends to benefit producers in the traded sector and impose costs on people who aren’t in the traded sector. Like teachers, pensioners, etc.”
Again I’m not for a moment seeing anything as a panacea. I fully expect that from here all of the choices are going to be painful and ugly, and if I had some magic wand to fix things I would certainly wave it rather than go through the pain to “teach people a lesson” or whatever else excessive moralizers on all sides seem to want.
I completely buy your argument for Greece (and I don’t know enough about Ireland to comment). It can’t leave and is now wholly at the mercy of however outsiders decide to fix things. The pain it is going to experience is going to be dictated by various European entities because Greece is so far out of balance that the pain of trying to live with a near balanced budget is worse than whatever the Germans are going to make them do at this point.
But again I’m not so sure about Spain and Italy. You’re totalizing my discussion into one of complete fixes and painless actions, but that isn’t what I’m saying at all. Both countries are near enough to budget balance that they could do without borrowing in the near future if they had to. (And Italy has been in surplus now for a while). Both countries have already been enacting the kind of austerity measures that the technocrats will demand from Greece. This means that they have already been doing the things they were supposed to be doing to avoid this kind of problem, and worse that they can’t possibly improve as much as Greece because they have already been doing it. Greece has obvious measures to get better, Italy and Spain have been doing those things for years. The fat has already been cut from the meat.
Meanwhile they are saddled with a monetary policy that is grossly out of whack for them. They need to experience GDP growth, but without currency devaluation it doesn’t look likely at all. The ECB seems completely uninterested in devaluation, so Italy and Spain are screwed for the forseeable future, despite the fact that they have already conceeded to the demands for austerity, despite the fact that they have worked to get their houses in order, and despite the fact that they are at or near primary budget surplus.
That is going to be a big problem. I’m not saying that the balance of default/exit vs. staying in is clearly in the favor of exit *YET*.
But I am saying that if the EU tries to push much further it could get to that point, and unlike Greece it is clearly a live option. The official line, which you seem to be agreeing with, is that the pain of leaving is obviously too much to be considered. But the pain of leaving has possibility for relief. At this point the pain of staying appears that it may be endless.
Sebastian H 12.11.11 at 5:55 pm
Also, in the English language stuff I read, I’m not seeing much about why France is in trouble. What’s up with that?
Goldcap 12.11.11 at 6:59 pm
@dsquared “All of the nationalism and anti-German sentiment is a distraction from the real scandal here.”
Well, I would agree that nationalism of any slant is generally unproductive, but there is a very real point to be made, seen much earlier in this thread but not really addressed, that EU policy for whatever reason, mostly political but not solely so, is shielding bondholders and institutional investors over the very real problems of unemployment and austerity-enforced GDP constriction. IMHO this is the real scandal, that capital trumps labor.
Also, contrary to your assertion in #36, “The (german bailout) money is being taken from them”, JQ’s point (ii) in the inital post seems to me completely valid. Think of it this way: the proposed bailout transfer isn’t presumably taking the form of actual increases in taxes, but rather a redistrubution of debt, i.e. from Irish to German. So who is really paying? And after all, wasn’t issuing this debt poorly advised? Shouldn’t they fail? Shouldn’t the issuer bear some responsibility? (I would argue MOST of the responsibility…) Taxpayers may bear some cost from the excess German Soverign Debt, but presumably interest rates rise, crisis is seen to avert, and recovery ensues? With patience, would’t this have benefit?
So I just find it hard to hear a moral argument from Capital that investors need to be made whole, but no similar argument that Capital be held to account. Seems there should be recognition that all the debt overhang, spread between austerity AND haircuts, would perhaps be the most effective way to clear balance sheets, rather than one or the other?
bobbyp 12.11.11 at 9:40 pm
“….the same way a California bankruptcy would not affect the dollar. Greece simply refuses to pay.”
Well, California is not a sovereign state, so no, it does not strike me as the same. If California went bust, New York could not impose ‘sanctions’ and demand that California cut their budget, lay off all their state employees, and sell off all that state owned marvelous view property on the Pacific Ocean.
bobbyp 12.11.11 at 9:43 pm
“What’s up with that?”
The current Euro arrangement is pro-cyclical. When things go bad, the policy mandated (austerity) makes things worse. Deficits increase, putting pressure on government bond markets since member states are tied to a currency they do not control.
gordon 12.11.11 at 10:28 pm
The argument about Govt. debt in the Eurozone often means people forget about private debt. This post by P. De Grauwe includes a graph of both, revealing the much higher levels of private debt in the E-zone (higher than Govt. debt, I mean).:
http://www.voxeu.org/index.php?q=node/5062
It’s a bit old (May 2010) but I suspect the basic significance is still there. De Gauwe remarks:
“While the government debt ratio in the Eurozone declined from 72% in 1999 to 67% in 2007) the household debt increased from 52% to 70% of GDP during the same period. Financial institutions increased their debt from less than 200% of GDP to more than 250%.
.With the exception of Greece, the Eurozone governments were more disciplined than the private sector in containing their debt.
The explosion of the government debt after 2007 was the result of a necessity to save the private sector, in particular the financial sector.
Those who say that it is government profligacy that is the source of the debt crisis are mistaken.
gordon 12.11.11 at 10:28 pm
The argument about Govt. debt in the Eurozone often means people forget about private debt. This post by P. De Grauwe includes a graph of both, revealing the much higher levels of private debt in the E-zone (higher than Govt. debt, I mean).:
http://www.voxeu.org/index.php?q=node/5062
It’s a bit old (May 2010) but I suspect the basic significance is still there. De Gauwe remarks:
“While the government debt ratio in the Eurozone declined from 72% in 1999 to 67% in 2007) the household debt increased from 52% to 70% of GDP during the same period. Financial institutions increased their debt from less than 200% of GDP to more than 250%.
.With the exception of Greece, the Eurozone governments were more disciplined than the private sector in containing their debt.
The explosion of the government debt after 2007 was the result of a necessity to save the private sector, in particular the financial sector.
Those who say that it is government profligacy that is the source of the debt crisis are mistaken.
gordon 12.11.11 at 10:29 pm
Sorry, that (100) somehow somehow got sent before I’d finished fiddling with the layout. I think it’s pretty comprehensible, though.
guthrie 12.12.11 at 12:01 am
So what does this mean for us normal folks? I’m only an interested amateur, and this Europe stuff seems a total mess to me, yet one which will massively affect my life over the next few decades.
D squared’s comment:
“I think Niamh is right here – basically what we are seeing here is a takeover of Europe by the neoliberal “permanent government†who failed to get their way by democratic means. ”
does seem to me what is happening; a bunch of people are forcing countries towards policies which as far as I can see with the likes of the austerity one, don’t work and will mean great pain for normal people and the maintenance or increase of great income inequality.
Kevin Donoghue 12.12.11 at 10:09 am
Nick Rowe on the structural deficit rule:
Kevin Donoghue 12.12.11 at 10:10 am
(The second paragraph is also Nick’s.)
Henri Vieuxtemps 12.12.11 at 10:22 am
I think on the ideological side all it means is that ‘the third way’ model (‘you don’t need a union, don’t worry the government will redistribute’) is now collapsing, after what, about 2 decades or so. Is that really surprising?
But the Nordic model is still alive and kicking. More or less.
Richard J 12.12.11 at 11:17 am
On the other hand, I can see this as a nice little sideline for some macroeconomists. “You want to pay me to convince a bunch of lawyers that your actual deficit is not a structural deficit? OK.â€
On a MNC level, this is pretty much what a transfer pricing specialist does.
Andrew F. 12.12.11 at 11:54 am
Niamh @82: There is a kind of weird step-wise institutional logic at work on the part of the central bankers: the hard-core members of the ECB insist upon stronger fiscal disciplines to avert the risk of moral hazard. They might then perhaps be more willing to take on the role of ‘lender of last resort’ for sovereign debt. (There is already greatly increased liquidity provision for the banking sector). Hence Draghi’s half-hints.
But getting these guarantees, however necessary, is a medium-term project, fraught with political difficulties. What we need is an immediate life-raft and a strong vision about what the long-term plan will look like.
I think this is exactly right. I’d only add that the longer the eurozone simply treads water, the harder it will be to build that raft. Eventual German acquiescence to greater fiscal and monetary support for the periphery and the edges of the core will be expensive.
dsquared 12.12.11 at 12:38 pm
I’d only add that the longer the eurozone simply treads water, the harder it will be to build that raft
I don’t see why this is true; either that the Eurozone is currently treading water or that delay makes things worse rather than better. What is the EFSF/M if not a life-raft?
I think people are assuming that there’s some great solution that is being held up whereby Greece and Ireland have a super-quick recovery. It isn’t going to happen. Ireland’s had a massive wealth shock, and Greece has to rebuild the entire basis of its fiscal system. That really can’t be dealth with quickly or painlessly.
Walt 12.12.11 at 1:08 pm
What’s happening now in Europe is an unnatural phenomenon — this is the great insight of Keynes. “But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.”
Greece and Ireland have problems, and there must be adjustment. But these problems will not be addressed any faster by mass unemployment. And yet the preferred policies of the powers that be have produced 15% unemployment, and may produce even large amounts in the future. This is a failure on the part of European leadership, and we should never forget this.
Guido Nius 12.12.11 at 1:13 pm
Mr. De Grauwe is obviously right that the real issue started in the US but wrong in the rest. This is not a problem if averages but of extremes.
What is ridiculous is to suggest that continental Europe is a neo-liberal heaven. If I were a neo-liberal I would deflect all attention away from the Anglo-Saxon model that has so clearly failed.
Sebastian H 12.12.11 at 3:49 pm
“I think people are assuming that there’s some great solution that is being held up whereby Greece and Ireland have a super-quick recovery.”
I assume that Spain and Italy are going to have serious problems staying with the euro unless they have fairly large growth (more than 3% per year for a decade or two) or unless the ECB adopts noticeably looser monetary policy (target of maybe 4%). Do you disagree that at least one of those two things needs to happen? Do you forsee either or those things happening?
Without growth they are going to need a looser monetary policy. Without a looser monetary policy they aren’t likely to get growth.
dsquared 12.12.11 at 4:25 pm
No, I don’t see that. If you can get the Italian government bond yield down to 4% (through some combination of quantitative easing and shortening the average term, which is very long), then 2% real growth, 2% inflation and 1% primary balance (a not wholly ludicrous combination) gets the debt balance down pretty quickly. Spain stabilises the debt ratio at zero primary balance in the long term, under similar assumptions.
politicalfootball 12.12.11 at 4:26 pm
If the ECB was setting rates for Germany, they’d be at least a per cent higher. … the Optimal Currency Area argument doesn’t benefit from a nationalist spin.
“For Germany” seems to mean, in this context, “according to German policy preferences.” Surely those German policy preferences are not, actually, the best thing “for Germany,” which has a big stake in the prosperity of the rest of the Eurozone. In any event, given the differing priorities of Germans from other Eurozone stakeholders, the nationalist spin seems pretty understandable, and indeed inevitable.
That said, I’d like to understand dsquared’s big-picture view better than I do. If he’s developed his thoughts at any length elsewhere, I’d love to see a link.
politicalfootball 12.12.11 at 4:32 pm
113 last before reading 112, which actually resolves my biggest question about dsquared’s big picture view.
Walt 12.12.11 at 4:40 pm
Daniel, could you say more about the EBA data you mentioned above? I’m not finding anything at the granularity that would tell me how exposed certain countries’ banks are to specific sovereigns. (Though I’m tragically bad at finding data, so it’s not surprising I’m not finding it.)
Sebastian 12.12.11 at 5:02 pm
By not wholly ludicrous, what do you mean? Unless I’m reading it wrong (I used this for inflation adjusted GDP growth, and I used 1987-2007 so as not to weight in the recent global recession–which may or may not be a legitimate assumption) I don’t see Italy hitting 2% real growth even once in the last 20 years, nearing 1.5% only 5 years out of 20, and averaging a little less than 1%. Assuming that Italy can get growth of almost a full % more than its average over the last 20 years as its population ages quickly (compared to many other nations) and as it continues to get inappropriate monetary policy, seems almost heroic.
I don’t have a deep enough understanding of the bond market to know whether or not the 4% assumption is reasonable though I’m more skeptical than you seem to be about how much quantitative easing we can expect in the near term. The current prices however, after flirting with the scary 7% level, seem to be hovering around 6.5% after all the recent talks. Historically (pre-global depression) they were in the 4-5% rate. Do you really forsee them dropping down to “everything is completely fine and the market thinks they are wholly backed by the ECB” history though?
I’m not trying to being argumentative for its own sake. I fully admit to not having a deep understanding. But I see lots of worrying signs, and the most worrying being that the experts who failed in the last ten years don’t seem to be worrying about the worrying signs now.
PaulB 12.12.11 at 10:26 pm
—
Sebastian H 49: But for Italy and Spain, primary surplus is within reach, right?
dquared50: right. Italy actually has one now.
—
According to IMF data, which I plotted here Spain had a primary deficit of 7.849% of GDP in 2010 (in a deficit of 9.242%). Its reported deficit for the first three quarters of this year was 4.59%, aiming for 6% for the full year, something like a 4.5% primary deficit. That’s a pretty impressive reduction, but it’s a long way from zero.
The problems of Italy and Spain are different. Italy has a debt problem, Spain has a deficit problem.
Random Lurker 12.12.11 at 11:47 pm
@dsquared 112
In your ipotesis, Italy would reduce debt by 1% a year.
However I think that in the pact recently disclosed countries are supposed to lower debt to no more than 60% of gdp in 20 years. Since Italy’s debt is 120% of gdp, this implies a reduction of 3%/year of debt, wich frankly seems impossible to me.
Plus: Italy is supposed to increase growth from a likely -0.5% of next year to a +2% in a situation where not only the italian state is draining money out of the system, but also private debt is likely to dry up and its mayor trading partners are also supposed to go in full austerity mode, thus making an increase of exports very unlikely.
There is also another very big problem: the problem for Italy is competitiveness, seen as productivity/labor costs. This means that to solve this problem Italy has either to increase productivity or to lower labor costs. The present austerity strategy will likely lead to lower labor costs, via very high unemployment.
This would make some sense if Italy could increase export a lot because of the lower labor costs, but 1) this would just be a beggar-thy-neighbour strategy and 2) other countries also are supposed to implement the same policies, so that we will only have falling labor costs everywhere with fixed debt burden, wich is a big problem. In this scenario we would not have inflation in wages (because of high unemployment), but inflation in wages is the only way inflation can help to solve the debt problem. For example, part of the austerity package drafted by Monty is to de-index retirement from inflation (retirements up to 485e/month are still indexed, retirements up to 980e month are partially indexed). All those are clearly anti-inflation measures, and people who know that their retirement won’t be indexed to inflation are likely to save a lot before retirement, wich further increases deflationary pressures.
Bottom line: this will create a muliyear depression for Italy, will foster political extremism of some kind (although today there are no “maverick” politicians suited for the role, someone will pop up sooner or later), and what’s more will not work anyway (Italy will either default some year from now or the ECB will have to print euros and pay for Italy’s debt).
dsquared 12.12.11 at 11:52 pm
In real life, some form of tax on the EUR8trn of Italian household wealth is going to play some part in it.
Random Lurker 12.13.11 at 12:06 am
@119
This sort of “wealth tax” has been discussed (“patrimoniale” in italian), and I think that it would be a good move, but currently a big “patrimoniale”seems quite off the table. A big problem is that this sort of tax is likely to cause a capital run out of Italy, unless the government imposes some sort of capital controls.
Sebastian 12.13.11 at 1:29 am
And the imposition of capital controls is why you’ve said that default isn’t likely to be effective, so we’ve gone full circle.
politicalfootball 12.13.11 at 1:52 pm
One gets the sense that Draghi is kicking the can down the road in the hopes that something good will happen – something that will give Italy numbers like those described in 112 – but nobody has persuasively described the chain of events that will create those numbers. As Krugman would say, contractionary economic policy is contractionary.
I think we all agree that default would be a calamity, and I share dsquared’s assumption here:
As I say, I don’t think anyone’s really done the cost-benefit analysis and published it, but I bet the Italians, Greeks, Irish etc have done and I bet the calculations don’t even nearly stack up.
At some point, though, the equation changes, and the current path seems to be for
GermanyEurope to insist on an unsustainable level of austerity. As Stein taught us, things that are unsustainable won’t be sustained.So what gives? One possibility is that the Ger – that is the ECB – relents, and starts tailoring policy aggressively for the entire Eurozone. Another possibility is that things spiral out of control to the point where the cost-benefit spreadsheet yields a different result regarding default. Indonesia had a happy outcome compared to some alternatives.
And still another possibility is that long before the cost-benefit spreadsheets demand a default, the folks with the spreadsheets get thrown out of power in favor of people who don’t give a damn about spreadsheets or, alternatively, people who are willing to do what it takes to enforce the kind of austerity that the spreadsheets demand.
I’d like to hear more about the happy scenario, though – the scenario under which Draghi has taken solid steps to ensure that Italy will get the interest and growth rates it needs.
Guido Nius 12.13.11 at 2:07 pm
It’s better to kick the can than to try to shoot it.
James Wimberley 12.13.11 at 9:25 pm
dsqared in 112: ¨If you can get the Italian government bond yield down to 4% (through some combination of quantitative easing and shortening the average term, which is very long)..¨
It may be long by current standards, but these standards may be part of the problem. A short maturity profile requires countries to roll a lot of debt over every year, putting them in the power of the bond market vigilantes. Britain in 1815 had a debt-to-GDP ration now estimated at 290% (the debt total was known at the time, the GDP estimate is of course modern and approximate). But the debt was in consols, perpetual bonds. All the British government had to do was raise enough tax to meet the interest. For the rest, it could ignore market sentiment entirely. A primary budget surplus and economic growth reduced the ratio to a very low level by 1914.
Betwen default and debt bondage to Germany, could not a forced debt lengthening be a half-way house for Spain and Italy?
PaulB 12.13.11 at 9:51 pm
The average term for Italian government debt is about 7 years, which is typical for continental Europe. The UK’s average term is about 14 years.
PaulB 12.14.11 at 9:28 am
While I’m fact-checking for you: as dsquared said, the ECB published data on European bank holdings of sovereign debt along with its stress tests in July. The FT created a nice toy for playing with the numbers. German bank holdings of Italian debt came to about 30bn euros, which is not tiny, but it’s less than 2% of Italian net government debt. Their exposure to Spain is smaller.
Since then, banks have tended to sell risky sovereign debt whenever the ECB has been willing to buy it.
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