2015 June 29 Monday
EU Worse Than Greece In Handling Debt Crisis
Barry Eichengreen, a prof of econ and poly sci at UC Berkeley, says the EC, ECB, and IMF were more incompetent than Greece in handling the Greek debt problem.
Still, this incompetence pales in comparison with that of the European Commission, the ECB and the IMF.
The three institutions opposed restructuring in 2010 when the crisis still could have been resolved at low cost. They continued to resist it in 2015, when a debt write-down was the obvious concession to Mr Tsipras & Company. The cost would have been small. Pretending instead that Greece’s debts could be repaid hardly enhanced their credibility.
Greece has been in an economic depression for over 5 years. The Greeks elected bad politicians who spent too much money. They had retirement benefits kick in too soon for too many government-employed workers. They had too many stated owned enterprises. But how ever did the Greeks manage to ring up such high levels of debt? Reckless northern European financial institutions lent them the money. If only banks in Germany and other countries hadn't been so reckless the Greek crisis wouldn't have happened.
The northern European countries are acting like they are in no way responsible for what has occurred. Yet they recklessly let Greece into their currency union even though Greece already had too much debt and irresponsible government policies on retirement and government-owned companies. The northern European countries were irresponsible.
But the northern European elites naturally don't want to blame themselves. Even more important, the northern European countries probably believe they need to take a hard line toward Greece or else Italy, Spain, and Portugal will spend too much and create conditions for much larger defaults.
What worries me about the Greek crisis: the central banks have already shot their wad in dealing with the last global financial crisis. They can't lower interest rates much because interest rates are already very low. The governments will have a harder time using deficit spending as fiscal stimulus since they ran up so much debt already in the last financial crisis.
I hope the Euro countries really have effective tools to keep the economic crisis in Greece isolated to Greece. They like they do. We will find out.
By Randall Parker at 2015 June 29 10:14 PM
RP: "Reckless northern European financial institutions lent them the money. If only banks in Germany and other countries hadn't been so reckless the Greek crisis wouldn't have happened."
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Most of the reckless northern European financial institutions, were German. But their "recklessness" was just an exercise in Keynesian economics: they lent their money to Greece (and other South EU countries) so that the Greeks could buy German goods in the free trade zone, for the Greeks did not have much money to spend by themselves in the first place.
And here is a recent free Stratfor article by George Friedman where it is explained what Germany is really trying to do:
The European creditors — specifically, the Germans, who have really been the ones controlling European negotiations with the Greeks — reached their own terminal point more recently. The Germans are powerful but fragile. They export about a quarter of their gross domestic product to the European free trade zone, and anything that threatens this trade threatens Germany's economy and social stability. Their goal has been to keep intact not only the euro, but also the free trade zone and Brussels' power over the European economy.
On this occasion, let's emphasize why Friedman used the word "quarter" instead of "half": What he meant above is that Germany exports HALF of its GDP and that HALF of its exports go to the free trade zone of the EU, so that one a quarter (=0.5*0.5) of their GDP is exported to the European free trade zone. Thus if the European free trade zone is abolished Germany will lose half of its exports, which would be half of its GDP getting wiped out.
In a previous Stratfor article Friedman said that half of the German exports go to the European free trade zone:
Thus, since the Greek economy is only 2 % of the EU, the Greek situation is just a drop in the bucket, but the combined trade deficits of France, UK, Spain and Italy against Germany is absolutely huge: as a fraction of the GDPs of these countries, the deficits of both France and UK against Germany are of the same scale as the US trade deficit against China, and Germany cannot afford to lose this surplus. But on the other hand, the EU countries cannot afford to continue running such trade deficits against Germany because they do not have the same privileged international situation as the US which can continue running such enormous trade deficits (although this might also come to an end in a few years.)
My typographical error above: I wrote "Thus if the European free trade zone is abolished Germany will lose half of its exports, which would be half of its GDP getting wiped out." Instead, I should have said: "Thus if the European free trade zone is abolished Germany will lose half of its exports, which would be a quarter of its GDP getting wiped out. " :)
So it follows from these percentages that it is very likely that the other major EU countries (most notably France and UK) will have to crack down on the free trade zone in the EU, and Germany will lose most of its European export profits. This means that there will be big social unrest in Germany as well, causing Germany to develop more anti-foreigner sentiments, possibly re-militarizing in a few decades. I suspect that this is what Vladimir Putin had in mind when he started to create a buffer zone in Ukraine, and there was a method do Putin's madness.:)
RP: "The governments will have a harder time using deficit spending as fiscal stimulus since they ran up so much debt already in the last financial crisis."
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Actually, if the interest rates stay low (currently still below inflation level), then the governments can not only continue deficit spending but actually increase their deficit spending, the reason being that western governments do their deficit spending by first borrowing from the rich to give to the poor for the poor to spend and buy from the rich, and when the interest rates are below inflation, the government does not lose but actually makes a net profit by doing deficit spending.:) The only catch is that for unforeseen reasons, if the rich refuse to lend to the government, then the deficit spending would halt, but in the absence of a change of attitude in the upper classes, an increased government spending by means of massive borrowing at below-inflation interest rates, would actually be a wealth tax on the rich (although this tax would be more than compensated for due to the fact that the upper class nearly doubles the money that it lends to the government since the poor who then spend that money end up giving it to the upper class by spending it.)
Low interest rates continuing indefinitely are very bad for pensions in the long run.
Certainly the low interest rates are a disaster for the pension funds, especially since the rates are likely to stay low for a long time. That being said, the reason the rates are low is not just because the government needs to borrow a lot, but the fact that the GDP is growing at a rate even that barely matches the rate of growth of the population (possibly even lower than the rate at which the population is growing.) In this environment the interest rates cannot be higher than the current level because it would otherwise for the people in general (not just the government) to pay higher interest rates. The other exceptions are the stagflation scenario as in the case of the 1970s when the oil embargo caused a combination of economic contraction and inflation, and/or other panic situations people become desperate to hoard various goods instead of money, and so the rates can go up without GDP growth.
To recapitulate, here is what George Friedman predicts in the last paragraph of his article:
The problem is simple. The core institutions of the European Union have functioned not as adjudicators but as collection agents, and the Greeks have learned how ruthless those agents can be when aided by collaborative governments like Cyprus. The rest of the Europeans have also realized as much, which is why Euroskeptic parties are on the rise across the union. Germany, the country most threatened by growing anti-EU sentiment, wants to make clear that debtors face a high price for defiance. And if resistance is confined to Greece, the Germans will have succeeded. But if, as I think it will, resistance spreads to other countries, the revolt of the debtor states against the union will cause major problems for Germany, threatening the economic powerhouse's relationship with the rest of Europe.