EconoMonitor

How This Gets Even Uglier

At this risk of beating a dead horse, I reiterate that I don’t see how the European situation comes to a happy conclusion.  Conditions in Greece appear to be deteriorating rapidly.  Via Athens News, retail sales are in freefall:

Retail sales by volume fell 8.9 percent year-on-year in November after a 10.8 percent drop in October, statistics service data showed on Tuesday.

Households, burdened by austerity measures to plug deficits and rising unemployment, have cut back on spending.

Consumer confidence has also been hurt by a climb in the jobless rate to 17.7 percent in the third quarter.

Officially, hope springs eternal:

“Increasing unemployment and austerity are likely to continue weighing on disposable incomes and consumer demand in the first months of 2012. However, a positive conclusion of the PSI deal and the approval of the second bailout package could provide a kind of positive shock to business and consumer sentiment,” he added.

Right, good luck with that, as the next agreement is only about tightening the screws even more.  How exactly will consumer confidence get a boost given an acceleration in wage cuts, a late holiday gift from the Troika.  An interview with the IMF’s Poul Thomsen, via Kathimerini:

Are you advocating wage cuts?

Let me begin by saying what I think we all agree on. Greece still has a large competitiveness gap. Closing this gap will require actions on many fronts, not only wages, but it is clear that wages for the economy as a whole are too large compared to Greece’s productivity. One could hope to magically raise productivity to levels that will justify the current wage level. We are trying, but there is a limit to this. Thus, part of the adjustment must come by more closely aligning productivity in individual enterprises with wages. Reforms to the wage setting mechanism, to the system for collective agreements could help in this regard. I think that most of us agree on what I have said so far. Where we need to be more convinced, is that such reforms can deliver results in the foreseeable future. If not, we believe that the government should consider more direct interventions for a temporary period, until reforms become effective. These could include limitations on the minimum wage and possibly the 13th and 14th salaries. We are still discussing this. It is too early to say. We need to better understand what kind of reforms the government has in mind.

Under conditions of never-ending austerity with no exchange rate release valve, what exactly is the half-life on any new plan to reduce Greece’s debt to GDP ratio to 120% by 2020 (itself a questionable goal)?  3 months?  6 months?  Back to deteriorating conditions, via Kathimerini:

Archbishop Ieronymos, the head of the Church of Greece, has taken the rare step of writing to Prime Minister Lucas Papademos to express serious concerns about the effectiveness of the government’s fiscal policy and the effect it is having on Greek people.

In his letter, Ieronymos also raises doubts about the role of the European Commission, European Central Bank and International Monetary Fund – or troika – in the country and whether Greece should agree to further austerity measures to receive its next bailout, suggesting that they are “larger doses of a medicine that is proving deadly.”

Ieronymos expresses concern about the impact of the crisis, describing a rise in suicides, homelessness and unemployment and the desperate state that an increasing number of Greeks find themselves. He warned that this was creating a dangerous social situation.

“Greeks’ unprecedented patience is running out, fear is giving way to rage and the danger of a social explosion cannot be ignored any more, neither by those who give orders nor by those who execute their deadly recipes,” he wrote.

Meanwhile, Germany appears to have underestimated the possibility of resurgent nationalism in the periphery.  Via Athens News:

Twenty-eight MPs tabled a proposal in parliament on Thursday requesting a debate on the so-called occupation loan paid by the collaborationist government to Germany during the Second World War as well as the issues of reparations for victims of Nazi atrocities and looted treasures…

…The MPs stressed that the now united German state owes Greece, a Second World War victor, roughly 54bn euros before interest, underlining that Greece was the victim of unparalleled cruelty inflicted by the Nazi forces.

The signatories stressed that Greece has been the subject of an obvious injustice because it is the only country to which Germany has not paid reparations.
Reopening the wounds the Euro was meant to close.
Call me a pessimist, but I can’t help but conclude that unless Greece gets real relief more quickly, the cost of being in the Euro will outweigh the costs of leaving.  At this point, I am starting to wonder what was the bigger mistake – to allow Greece into the Euro in the first place, or to force them to stay?
This post originally appeared at Tim Duy’s Fed Watch and is posted with permission.

13 Responses to “How This Gets Even Uglier”

DGCFebruary 3rd, 2012 at 10:05 am

Greece's wages need to be reduced to make their economy more competitive, but the Euro also wants Greece to repay its debts. Where does the debt service money come from?

EugenFebruary 4th, 2012 at 3:46 am

I have even a better solution, put together the Greek politicians and make them decide about reducing the wages and pensions in the country by half. By this decision they will prevent the rising unemployment and will stop the agony of inevitable process of wage reduction which will happen at the end anyway. By creating this unthinkable precedent for other countries in similar situation, they will probably save the European if not the world economy. This would put the Greek politicians in one line with Achilles, the ultimate Greek hero.

DiranMFebruary 4th, 2012 at 4:52 am

Your comment belies the issue. Would this work a lot better with flexible exchange rates, duh…. Euroweenies are generally too thick mentally to understand this, yet this despised system worked well. Greece under the drachma never had such a crisis as today. Who could have imagined such a systemic debt crisis prior the Euro?

Let's consider the consequences of your modest suggestion: people's income would be cut in half, but their expenses and liabilities would remain as they were, so there would be a drastic reduction of living standards and GDP, a rash of loan defaults and the tax base would implode. Basically, an acceleration of what is already happening in Greece where Greek public debt from modest discounts is now almost worth nothing. Dismal failure for normal people, but success for the Euroweenie crowd!.

Irving Fisher wrote about these sorts of things in the 1930's, but Europeans either suffer from an appallingly low level of education in economics or rather their dogmatism and ego over the Euro experiment prevents them from thinking clearly.

DiranMFebruary 4th, 2012 at 4:53 am

Your solution is effectively Stalinist type thinking! The Euroweenie crowd have locked themselves into a single currency but they remain separate states. It was a sort of Stalinist central planning with a goal to force countries into a single entity whether they really wanted or not. The Soviet Union worked on this principle and there was a Comintern that enforced their rules on the various Soviet Republics and Satellite countries. The EU works in a similar way. The Core cracks the whip and the Periphery are the slaves.

Let's not forget that the Soviet Union (and the Rouble zone) broke up because the central planning system created unsustainable imbalances and the people revolted from the deprivation of freedom. It is not by chance that we now have Commonwealth of "Independent "States. That should bring a chill to the Euroweenie crowd, who show the same arrogance as their Soviet predecessors!!!

rodanogenFebruary 4th, 2012 at 9:21 am

What most worries me are people without sense of humor, who when opposed immediately start cursing their opponent.
You think comparing European Union to Stalinist regime is an appropriate way to discuss the faults of the Greek politicians and Greek public, who brought this economic misery consciously on themselves? Who forced them to Join EU? You should know how they manipulated economic figures, just to be excepted into the Euro zone. Don't tell me they did not know the consequences of their fraud? Just check how many times in the past 10 years the economic columnists wrote about Greece, as "The sick man of EU". So you suggest, that there is no need for responsible behavior of political leaders and their supporters, and fraud and deception should be positively priced. Yes i am for Drachma. Let the Greeks have it and let them cope with the consequences. Probably their standard of living would drop with Drachma back to the situation after WW2. Then all the Communists, Populists, Fascist will be perfectly happy. This is the their time to bring their solution, to plunder the country and keep everybody's mouth shut up.

DiranMFebruary 4th, 2012 at 9:33 am

Your reply illustrates why the EU does not work. If you really believe that the European sovereign debt crisis is entirely the fault of Greece, this seems rather ridiculous. Further it shows the ugly attitude of the Brussels elite and their dogmatism similar to their Soviet predecessors.

The PIIGS present a very wide range of case studies and they are all in trouble. Actually the best performing European countries are those outside of the Eurozone and even the EU. The EU has become the armpit of the world economy in terms of poor growth rates and high unemployment collectively – matters that the Brussels elite have never really cared about. Right the EU/ EZ is considered the biggest risk in the world economy. This is a result of their mania with debt deflation, etc.

Now Greece never should have joined the Eurozone, but the Brussels elite never took seriously the Mundell conditions for a sound currency union in the first place. They did not even follow their own rules seriously. For political reasons, they absolutely wanted every one in the Eurozone. They saw this as a tool for forced political integration. Sound economics never played any role in this.

DiranMFebruary 4th, 2012 at 9:41 am

The mess in Greece is the collective responsibility of both the Greeks and Brussels. In fact, it is real cluster fuck. A mix of terrible public policy and a system of corruption and political patronage both in Greece and the EU.

How come the EU promoted Papademos to the ECB when he was Governor of Bank of Greece in the accession discussions that were based on false statistics? The EU system has always been to buy others off and to look the other way. The lack of transparency in Brussels is scandalous.

Conversely Papademos participated in putting Greece in the EZ when it did not meet the criteria, which was an extraordinarily bad policy decision of very high risk for his country. Yet Brussels has him in high regard and considers him the man to keep Greece in the EZ…..

Is this EU position consistent with any logic, beyond the dogmatism of their currency zone and forced political integration?

rodanogenFebruary 4th, 2012 at 10:47 am

You answer forces me to sit again to the computer and leave the more interesting activities i was planning to do, yet you have right for a proper answer;
1. I never said the Greeks are solely responsible for the economic grievances of Europe, yet it is the only country out of the P.I.I.G.S. who has got by now 50% discount on its debts and it is still not enough.
2. You are probably not very good at history, if you compare the political situation today to the happenings in 1929. While at 1929 the politicians did all the mistakes they could do to deepen the economic crisis, to mention some; Letting the banking system default, increasing interest rates, creating tax barriers etc. in 2008 the world economy found itself in much deeper problem than in 1929 and the politicians succeeded, until now at least, to prevent disastrous colaps of the economic system. Unfortunately the economic fundamentals are much more disturbing than in 1929 and let me be more specific here;
a. The first main problem of the world economy is not Greece but USA, with its huge imbalance of current account, that is still accumulating, and nobody sees end to it. When the 2007 bank crisis subprime started, it was hardly mentioned, that actually the subprime system of selling balks of credits, wrapped into attractive wrappings, was actually a financial system how to bring back to US economy the US dollars from the exporting countries like Japan and China. Conclusion, all the collapse of the banking system of 2008 is default of US economy. Since then, some measures have been taken, but still the current account ended in 2011 with deficit of 600 billion US dollars up from 470 billion at 2010 figures. Greece?!?, not even rolls for breakfast compared to US dinner.
b. Fortunately Europe doesn't have the same problem of current account, but it is due to the northern countries, while all the surpluses on current account that they generate is wasted mainly in Greece and some in Portugal, Spain and Italy see the following graph.
http://www.economonitor.com/rebeccawilder/files/2…

You may say all this helped German economy to find markets for its products. But there is a big BUT. As a payment for their products they got Greece governments bonds, that have to be write of now. This not only reduces the credit rating of Germany, (unfortunately credit is not valuated just by cash flow but also by net asset value, that was deeply damaged by the write offs.), but damaged the German pension funds. You may say you don't care about the German or French banks or other capitalistic institutions, but i hope you can`t say the same about the German workers, who lost their pensions in sake of supporting the Greek waste and consumption society, without to blush.
c. The world economy is changing in front of our eyes, and nothing can be done about it. The highly industrious, highly committed, young enthusiastic Asian people want their share from the world economic cake and the less industrious, less committed, old Europeans have to give up some of their economic privileges achieved in the past. This process is unfortunately painful and politically very hard to implement.
To conclude. Nobody is blaming the Greeks, that they grabbed what others gave them voluntarily in the past. All we want is, please realize, the free party is over, the time come to pay. You want Drachma?, have it, You want out of EU, go, You want to stay, be it, but don't ask others to pay your lunch.

Robert Patrick CoutinhoFebruary 5th, 2012 at 10:23 am

The United States has had a trade deficit for as long as I can remember (literally–I am 48 years old). That deficit must end. Greece has a trade deficit. That deficit must end.

The difference between the two is sovereign currency. Here in the U. S. we can, with paper, ink and press, pay our debts–by printing them. I am not advocating that; I am only pointing it out. When a 'trade deficit' occurs from state to state, the money flowing out of the state usually preceded people flowing out of the state. In Europe–for political and social reasons–that can not happen. Therein lies the problem of Greek (and other GIIPS) debt.

The only solution will be for the Greeks (and others) to become as competitive as their northern (for most of them) nations. This will happen either within the EU system or as a consequence of leaving the Euro and possibly EZ. I do not know which is more preferable, but I do know that this very situation was warned about before the entire debacle was set up in the 1990's.

rodanogenFebruary 5th, 2012 at 2:59 pm

Dear Robert it seems i am older than you and had the chance see the caricature publish in Economist or Newsweek front-page, where Nixon sprays the VW beetle car with 10% custom tax to reduce the deficit in current account with Europe. But then the oil price went up, and it was followed by inflation and then Regents policy of tax reduction joined by high interest rate that caused strong revaluation of the US$ against the other currencies, and this went on until Bush the father, one of the wisest presidents US ever had (Pity the Junior did not get to much of his wisdom), started policy of reverse. But he had bad luck.
Faced with a national debt that was approaching $3 trillion and a deficit that was out of control, president Bush, worked out with the Congress budget agreement in the fall of 1990. Combined tax increases with spending cuts both in defense and on social programs was intended to reduce the deficit by almost $400 billion by 1995. By the time this compromise was worked out, the country was already in the midst of a serious recession. As the result he did not get the second term and this was the end of coming to terms with the increasing deficit in the trade balance.
http://www.theglobalfczone.com/Deindustrialisatio…

Contrary to George Bush the father, the son following the dot.com crash, implemented entirely different policy. Thanks to it he was elected for second term, luckily enough the economic disaster he cooked blow up in his face before the end of his second term, othervice he and his Republican colleagues would blame the new (most probably democratic administration) for all the economic faults.

DiranMFebruary 6th, 2012 at 2:59 am

Oscar Wilde, who did have a sense of humor, said: "Children begin by loving their parents; after a time they judge them; rarely, if ever, do they forgive them."

I am for survival of the fittest, meaning that Greece goes back to the Drachma, admits insolvency and does a hard default like Iceland, Russia, etc. No more Ponzi EU bailouts, throwing good money after bad nor transfer unions.

Let the Germans clean up their undercapitalized banking system, take their losses on EU sovereign debt and suffer a currency appreciation via a Greek devaluation. Let the Greeks learn that living off transfer money is a very bad idea and realize the importance of earning foreign exchange via exports of goods and services to cover their balance of payments.

Freedom is the best incentive – you can hang yourself if you please…..

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