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Europe continues to demonstrate it has no answers

Last week, the German Magazine Der Spiegel carried the story (May 6, 2011) – Greece Considers Exit from Euro Zone. I thought that if the story was true then Greek leadership must finally be coming to their senses. The reality is that the EMU bosses have once again stalled the judgement day and provided some soft relief for an economy that continues to deteriorate. Everyone knows what the problem is – the EMU doesn’t work and without a federal fiscal redistribution mechanism it will never be able to deliver prosperity. Every time an asymmetric demand shock hits the Eurozone, the weaker nations will fail. Trying to impose fiscal rules and austerity onto the EMU monetary system just makes matters worse. Greece should definitely leave the Eurozone. Life will be difficult then but the adjustment mechanisms that would then be available to the government (floating exchange rate and currency monopoly) are more people-friendly (capable of increasing jobs and income) than the way they are currently pursuing the problem (internal devaluation and demand contraction). Europe continues to demonstrate it has no answers worth considering.

The Spiegel story said that “(t)he debt crisis in Greece has taken on a dramatic new twist” and that “sources” told the journalist that the Greek government was considering leaving the Eurozone and reintroducing its own currency. This was ahead of a meeting of EMU Finance Ministers last week.

The economic problems in Greece are becoming more “massive” and civil unrest is growing with “protests against the government being held almost daily”.

The story claimed that the “crisis meeting” last Friday evening was an “alarmed” response to “Athen’s intentions” although if you read the news reports that came out of that meeting you would not have concluded that.

The Spiegel article reports that a secret German Finance Ministry report claims that a new Greek currency would devalue by 50 per cent on the Euro immediately and this would cause Euro-denominated Greek debts to soar.

In other words: Greece would go bankrupt.

Not in its new currency. By leaving the EMU is would declare bankruptcy in terms of the Euro but it could negotiate all loans into the new currency and be fully solvent.

That is the nature of currency sovereignty – a government can never go broke if all liabilities are held in that currency.

Spiegel said that the secret Report also claimed that if Greece went “(i)nternational investors would be forced to consider the possibility that further euro-zone members could withdraw in the future”. Yes, all of them should go – Portugal, Ireland, Greece, Spain – and then the system would collapse as it should.

The Report also noted that the ECB would have to write-down its holdings of Greek state bonds and “Germany would bear the majority of the losses” given its investment in ECB capital.

German neo-liberal economist, Hans Werner Sinn favours a Greek withdrawal. In this article (May 7, 2011) – Top-Ökonom sieht in Euro-Aus für Griechenland kleineres Übel – he said (by way of translation):

If Greece were to leave the Eurozone, it could devalue and become competitive. But of course there would be an immediate bank run. If on the
other hand Greece had a socalled internal devaluation in the required size of 20-30% in the Eurozone by cutting salaries and prices then it would be on the verge of civil war.

In my view, anti-social arrangements like those intrinsic to the design of the Eurozone cannot ultimately suppress individual dissent. As people work out that the Euro monetary system is so anti-people and anti-prosperity and more about meaningless rules (except when Germany and France violate them), there will have to be political changes.

But the rest of the press were not talking about a Greek exit.

The UK Guardian commented on the secret meeting of EU finance ministers in this article (May 9, 2011) – Greece will crash, so build up the buffers.

The Guardian commenting on last year’s €110bn EU bailout for Greece and the fact that Greece has “missed” its deficit reduction targets said:

The obvious conclusion is that the bailout is not working and that Greece’s debts, which are forecast to peak at 160% of GDP, are too high to allow the country’s economy to recover. In that case, eurozone leaders should stop pretending that more budget cuts and more calls for the Greeks to privatise state assets will make the numbers add up eventually. They should instead start talking about ways to reduce Greece’s debts and think about how to contain the knock-on damage to eurozone banks that hold Greek bonds.

It is not Greece’s debts that are making it hard for it to recover. It is the fact that the Greek government has accepted a nonsensical pro-cyclical fiscal austerity approach that stops the economy growing.

Growth is needed to (a) reduce its deficit; and (b) start reducing its public debt ratio.

Without growth, it is little wonder it is missing its austerity targets. The reality must be dawning on the Greek government that despite the rhetoric to the contrary from the Euro-conservatives the budget outcome is not something a national government can control irrespective of whether it issues its own currency or not.

The Guardian concludes that “the market views a Greek default as inevitable eventually” and that the EMU politicians will eventually stop bailing it out.

The author says that urgent policy issue is to ensure the Eurozone banks do not suffer when this happens. Which is the main motivation of the EMU bosses. The only reason they are keen to keep Greece within the EMU and beyond a formal default is that the big French and German banks would go down in flames given their debt exposure to the Greece.

The same day (May 9, 2011), Larry Elliot wrote in the UK Guardian that – Greek crisis lets Osborne peddle myths. Elliot also said that the ” secret meeting involving finance ministers from a selective group of eurozone countries” at the weekend did not consider Greece’s withdrawal from the EMU. Instead it was about “easing the repayment terms on its loans, providing a second bailout and debt restructuring”.

The relevant part of this article for today’s blog was his comparison between the UK and Greece. Elliot said:

To the extent that Britain is like Greece, it is that slower growth is making it harder to get borrowing down. In all other respects, the comparison does not bear scrutiny, not least because the UK is outside the eurozone and thus has the advantage of a floating exchange rate.

First, all national economies – whether their governments are sovereign in their own currency or not – operate in similar ways with respect to the response of production to aggregate demand (spending). Growth in output and employment comes in response to spending. If you cut spending you cut growth.

Spending can come from the private sector (consumption and investment), the external sector (net exports) or the public sector.

The floating exchange rate is a part of the crucial difference between Greece and the UK. But the more fundamental difference is that the UK issues its own currency while Greece is forced to use a foreign currency. To be fully sovereign in its own currency a government has to have a monopoly over its issuance and float it freely on foreign exchange markets.

The latter requirement frees domestic policy from having to defend the exchange rate. Under fixed exchange rates, monetary policy becomes tied to maintaining the parity (by buying and selling local currency in foreign exchange markets to prevent any excess supply or demand occurring). Fiscal policy then cannot push the economy to capacity if the external sector is in deficit. This is because monetary policy would be continually contracting local demand (by buying currency and taking it out of the economy and pushing interest rates up).

The UK will never be like Greece while they maintain their currency sovereignty.

But that is not to say that the austerity strategy will not work badly for the Brits just as it has for Greece. The point is that Britain doesn’t have to impose such austerity. The fake problem – an excessive deficit and rising public debt – is of no consequence to a fully sovereign nation such as Britain.

The deficit is a problem in Greece because it has to be financed through private markets (in lieu of the bailouts of the Eurozone which have effectively short-circuited the Greek government’s dependency on private bond markets, albeit only while the bailouts last and the ECB keeps buying Greek bonds in the secondary markets.

Which brings me to an article today (May 13, 2011) – Every euro-zone crisis is different – written by one Daniel Gros, who is the director of the Centre for European Policy Studies and has a PhD in Economics from Chicago, which I guess, goes a long way to explaining his viewpoint. The CEPS is largely neo-liberal in outlook.

The article is taken from this commentary – Sovereign Debt vs Foreign Debt in the Eurozone.

Gros claims that:

THE present crisis in the euro zone is known around the world as the “euro sovereign-debt crisis”. But the crisis is really about foreign debt, not sovereign debt.

He cites the example of Portugal that has public debt and deficit ratios similar to France but high foreign debt in the private sector (banks and firms). He claims this is why the “risk premium on its public debt increased continuously”. It is a strange argument and unconvincing.

The foreign debt exposure of the private sector in Portugal clearly exposes it to credit risk (default risk). But that is not a sovereign debt default risk. The Portugal government has default risk by virtue of the intrinsic design of the monetary system. All debt is effectively foreign to it because it uses a foreign currency – the Euro.

Gros goes onto to say that Italy and Belgium are not being attacked by bond markets nearly as much as Portugal because “both have very little foreign debt”.

My observation holds – all EMU nations have foreign-currency debt from the perspective of the national government. The most likely reason Italy and Belgium are less under attack from bond markets at present is because they are very large countries and bond traders know that the ECB/EU will never let them default.

Gros suggests that markets are focusing on foreign debt because:

… in a crisis, private debt tends to become public debt. Financial markets thus look at the overall indebtedness of a country. But it matters to whom this debt is owed.

But in saying that if the US absorbed private debts the bond markets would know that there was no risk of default because the US government issues the US dollar. But the markets also know that if a national government in the EMU was stupid enough to take on troubled private debt it would not be risk free anymore than when the private sector held it.

He does, correctly, bring in the fact that “euro-zone states retain their full taxing powers” and says bond markets know that a government can always repay “domestic debt” by increasing taxes. He goes one step further to say:

But the key point remains: as long as a government retains its full taxing powers, it can always service its domestic debt, even without the ability to print money. But this is not the case if the debt is owed to foreigners, because the government cannot tax them.

First, foreign-currency-denominated debt is a problem for any government – whether it issues its own currency or not. For a fully sovereign nation (like the UK, US, Australia), taking on foreign-currency-denominated debt immediately compromises their sovereignty and introduces default risk. The nation has to get sufficient foreign exchange (in the currency that the debt is denominated in) via net exports. If it cannot do that then the debt becomes problematic.

Second, retaining tax powers is only a necessary condition to being able to get enough tax revenue to cover liabilities. The tax base has to be responsible and sufficient to accomplish that. The problem is that the sort of problems that the EMU nations are in have come at a time when the tax base has shrunk dramatically.

Third, trying to exploit a “declining” tax base in a recession is pro-cyclical and is likely to reduce tax revenue even further as the economy shrinks.

Fourth, not having the “ability to print money” – which is Gros’s crude way of expressing currency issuing sovereignty (noting that governments do not “print money” when they spend) – is the crucial reason why the Eurozone nations are facing debt default. That is, ultimately the reason why they need to gain “finance” anyway.

Gros rather strangely says that while it is “foreign debt that constitutes the underlying problem for a sovereign with solvency issues”:

… fiscal adjustment is necessary but insufficient to escape a debt crisis. Fostering domestic savings, and getting citizens to buy bonds of their own government instead of keeping their money abroad, is just as important.

And so he further bypasses the main issue. Pro-cyclical fiscal adjustment makes the problem worse. It is being forced onto nations because they have surrendered their currency sovereignty. EMU nations are not”sovereign with solvency issues” – rather they are like the states in a federal system – a curious one at that which eschews “federal-level” fiscal adjustments to overcome asymmetric demand shocks. That is, they are not sovereign in any monetary sense.

A government can only foster domestic savings if it provides income growth. Austerity undermines both income growth and the private capacity to save.

Further, Greek would be much better off – defaulting on all Euro debt, introducing its own currency, and engendering economic growth – in part, via public works and also via its increased external competitiveness as the “drachma” devalues.

It should also abandon the practice of debt issuance and allow the central bank to pay interest on excess reserves as the means to maintain control over its own short-term interest rate.

Then the bond markets would become irrelevant, people would return to work albeit with lower real incomes (courtesy of the depreciation) and the Greek government could be judged on its own ability to administer sensible fiscal policy (or not).

Conclusion

After nearly a week concentrating on Australian issues (it was Budget week and Labour Force week after all) I thought some international discussion was needed.

Please see all my blogs about the – Eurozone as background for today’s discussion.

Saturday Quiz

The Saturday Quiz will be back sometime tomorrow.

That is all for today!

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    This Post Has 36 Comments
    1. My observation holds – all EMU nations have foreign-currency debt from the perspective of the national government. The most likely reason Italy and Belgium are less under attack from bond markets at present is because they are very large countries and bond traders know that the ECB/EU will never let them default.

      Gros is right at least on this. Spain is big but also faced a lot of issues with the markets.

      Euro Zone nations with high (negative) international investment position/gdp ratios are under trouble.

      Here is some stat at the end of Q2 2010. Data from central banks and statistical institutes.

      Net International Investment Position at the end of Q2 2010:
      Spain -€916b,
      Ireland -€189b,
      Greece -€218b,
      Portugal -€180b,
      Italy -€260b

      (4 times Q2 2010 GDP) :
      Spain €1,086b,
      Ireland €156b,
      Greece €235b,
      Portugal €171b,
      Italy €1,514b

      Hence (-NIIP/GDP) ratio is Spain 84%, Ireland 120%, Greece 93%, Portugal 105%, Italy 17%

      Will try to update it till Q4 2010. But partially explains why Italy is under less pressure in spite of having a public debt/gdp over 100%.

      Of course, the “markets” don’t know this but its the result of supply and demand. A rise in international debt implies more and more public debt has to be picked up by foreigners directly or indirectly putting pressure on yields.

    2. The European single currency either

      a) will end if European nations will maintain their identities

      or

      b) will end European nations identities if it is to be maintained.

      My reason to frame the problem as above is that “a federal fiscal redistribution mechanism” implies a fiscal union with uniforming policies and legislation across very diverse nations. This means a single State and a single State over different nations is unstable. Furthering the process of creation of such State in any form will lead to increasing bitterness and conflict among nations. There are already clear signs of this.

      Even under the actual ad hoc arrangement, people in Northern States are complaining about *loans* to the Southern “profligates”. Nationalist parties are gaining ground in (and out) the EMU. Can one imagine the German and the French living with the same rules? Or the Finns and the Portuguese having the same social attitudes towards work? Or everybody in the EMU learning English (!!!) to a so proficient level that a common linguistic base for generalized communication comes into existence? The more I think about it, the more I find that the “United States of Europe” is a notion that “does not compute” with the ways reality can evolve.

      Therefore, I think that b) will not happen. A further reason for this is that the diversity of European nations is one of the richest biological and cultural “assets” of entire humankind. If humankind as a whole is a very upper level biological organism – and there are very good reasons to believe that it is – it will react against losing such diversity.

      Therefore, in my opinion the two realistic scenarios of evolution to consider are:

      i) A planned and coordinated phasing out of the single currency.

      ii) A chaotic implosion of the single currency.

      The huge gains (or avoiding losses) of i) with respect to ii) strongly suggest that it be articulated. An interesting possibility to consider in this scenario is to morph the Euro into a kind of Euro-Bancor – an opportunity for Europe to play again a special role in the progress of civilization. Vigorous international trade is a most desirable thing. But national net trade imbalances are a very bad thing. Getting vigorous international trade together with generalized national net trade balances appears as key to evolution at large.

    3. All those that think the Greek debt in euros will remain in euros after the drachma adoption are wrong! 95% of greek debt is written with contracts that state the denomination is in the official currency subject to greek law. This means that when the drachma is officially adopted all debts of this category are converted in the new official currency at the official rate of conversion! Any debts in foreign currencies and loans from the IMF/EU/ECB, around 40 billion currently, contracted to be subject to international law do not qualify for this conversion and remains in the original currency of issue

    4. PG,

      Good points overall. But do you know about India ? .. a big fraction of the population doesn’t even know the “abc” of the national language Hindi and can’t speak the language. (25%?)

    5. Me thinks the Greek don’t need to exit the EZ. This will only create chaos and cause the mother of a bank run. Instead of announcing an exit from the € the Greek PM can announce that the government will issue new Drachma parallel to the Euro and the new Drachma will float against the Euro. But the Greek government will only accept Drachma to settle tax liabilities and will enforce tax payment in new draconian ways. Plus any future government expenditure will solely happen in Drachma. For some time there will be some mess but that’s about it. And if the Greek government chooses to bring into existence its own FIAT currency following the logic of MMT it also don’t has to turn to bond markets.

      Now for the existing € denominated Greek sovereign debt the Greek government can either offer conversion into Drachma bonds (which is a haircut for creditors) or refer the other EZ governments and the EU/ECB/IMF to the part of Yanis Varoufakis’ Modest Proposal which deals with the European zombie banks.

    6. “All those that think the Greek debt in euros will remain in euros after the drachma adoption are wrong! 95% of greek debt is written with contracts that state the denomination is in the official currency subject to greek law”

      If that is the case then it makes the bailouts negotiated with the EU even more stupid. The Greeks should just exit, convert the debt and settle it in the new currency.

    7. A further remark about the EZ crisis: I find it quite shocking how the EZ debtor governments handle the crisis. Last weekend I read in an Irish newspaper about an IMF official noting that the Irish government officials in negotiations with the ECB displayed strong elements of Stockholm Syndrome being hostages of the ECB. That is not the way forward!

      The action must come from the debtors. (“Owe the bank $100, that’s your problem. Owe the bank $100 million, that’s the bank’s problem” — J. P. Getty) It won’t come from the creditors who have every incentive to paper over the fundamental problem. Instead of walking like sheep to the slaughter the debtor nations should realize that they have enormous leverage in negotiations. And they need a credible plan B. In negotiation, the one key thing that really strengthens your position is the ability to walk away from the deal.

    8. Ramanan “Good points overall. But do you know about India ? .. a big fraction of the population doesn’t even know the “abc” of the national language Hindi and can’t speak the language. (25%?)”

      -I was also thinking about India when I read PG’s comments. Do you or anyone else know how India manages? Do they just redistribute willynilly across the nation as is done within the UK? If so do people in Punjab mind being in the same financial pot as people in Tamil Nadu or whatever? Is an issue that the public sector is smaller in India compared to Europe? When there were huge empires such as the Spanish, Portuguese, Dutch, French, British etc were there currency problems or was the situation so much one of just looting the empire to benefit the home country that the system functioned for that end?

    9. I ‘m a bit puzzled with the foreign sector in a possible Greek Euro exit.

      Up until 2008 balance of payments was negative -15% for Greece. Apart from tourism Greece does not have much to offer to the foreign sector and i think it would be logical to believe that if it wasn’t a part of the Eurozone the foreign deficit would be much smaller. As a result an exit from the euro would introduce a swift ‘correction’ in it’s foreign trade, especially in imports. How does one minimize the effects of such shocks in the real economy?

    10. While reviewing what Greece should do, realize that.

      1.-A surprise exit from the euro would bankrupt all Greek Banks, because of their foreing liabilities

      2.-To avoid a general bank run, extensive capital controls should be imposed. As an indirect result, it is very unlikely that free market with the rest of the Eurozone could persist, both because capital controls would make foreing transactions difficult, and because foreign creditors would not sit calmly and would likely impound on Greek goods abroad.

      3.-Very likely, the value of the new currency will not stabilize, because Greece would be a

      -a country without foreign reserves,
      -without a functioning financial sector.
      – with massive capital flight,
      – and serious conflicts with its creditors.

      So, it is possible that the value of the new currency could go into a free fall and create very high inflation. And the difficulties in obtaining foreign exchange (absent an IMF program) would mean the almost sure emergence of shortages in imported goods (sp. energy) that would wreck any recovery.

    11. India is federal so it works somewhat similar to the US although there is a wider disparity between states (some very free market, some quasi-Marxist) and much smaller federal power.

    12. Ramanan

      The case of India deserves study, but it seems very different from the EMU. As it seems me from a quick glance at Wikipedia, India has 2 main families of languages, with English (again!!!) being the common (state official and legally authoritative) language. This is a state of affairs – after near one century of UK rule over all territory.

      Now, let one compare with the Eurozone. It has 17 countries / states. There are 6 “branches” of languages: Romance, Germanic, Hellenic, Uralic, Slavic and Semitic (not counting Basque). I’m not a linguistic expert to compare the specialization level of these “branches” to the Hindi and Dravidian families, but it seems me that a program for getting people to use English as a quasi-native language, would take 50 years to become in full force – if successful.

      I would add that the Eurozone comprises 17 countries / states, yet one easily counts more 5 nations above the 17 number: some states are pluri-national. German and Belgium are federal states, which would make the “United States of Europe” a federation of federations and unitary states… Surely, Europeans like to be original :) but this does not seem a good way to be original… For example, Bavarian people would find themselves with the Bavarian Parliament, the (Federal) German Parliament and the (Federal) European Parliament. Not different in names from now, but very much in reality, because then the European Parliament would be something to take (much) more seriously than the German Parliament. I cannot believe that people in the Eurozone will come to accept that the European Parliament is to be taken more seriously than their national or state parliament. And anyway even the European Parliament would not function because, as is obvious, UK, not to mention others, will never join the single currency. So it would be necessary to have inside the European Parliament, the Eurozone Parliament…!!! In my sight, fiscal union with its implication of a full-fledged federal state is a dead-end.

      For centuries, European wars were the result of a recurrent conflict between nationhood and statehood. After the end of the Iron Curtain and the civil war in Bosnia, one could think: “Hopefully, this is the end! Now, states correspond to what nations pretend”. Disgracefully, we immediately went into the single currency, which, to function, requires a nobody-wants single state over all. We are trying to remake all the errors of the past at a much greater scale. Say that people in the Eurozone are clever… :D

      Maybe, as I said before, we can “learn with our errors” and turn this failed experiment into a more hopeful one by morphing the Euro into a kind of Euro-Bancor.

    13. PG,

      Good points again.

      IMO, India is vastly more diverse than the rest of the world put together. Of course, being an Indian, thats a biased opinion. But there are just too many languages, not just two. There are thousands of gods (-; The national language is not understood by even highly literate people in India … I mean not even a word types …

      But the key point is that a federal government is continuously making fiscal transfers without anyone noticing! Both consciously and unwittingly – it engineers a balance in the balance of payments – at least attempts to.

      But yes I agree that it may be difficult now to create a Federal Government for the Euro Zone since everyone has started noticing this even before any such plan. It is a win-win situation but people won’t look at it that way.

      I am not a fan of the Bancor because it socializes exchange rate risks.

    14. Neil: Iceland didnt introduce a new currency. Iceland had foreign reserves AND the support of the IMF. Iceland didnt lose access to her markets. The “neodrachma” would have to compete with the euro coins and notes prevalent in Greece (suposedly only “bank money, this is deposits would be converted to neodrachmas) driving the value of the new currency lower and lower. And in a “Grece with neodrachmas”, the necessary currency controls would break the rules of the eurozone, and would. drive Greece out of it.

    15. Eddie: “the value of the new currency could go into a free fall”.

      Why not dollarize the economy instead? Swap the present euro loan for a dollar loan, introduce the dollar as a currency and get a 30% plus depreciation that will help Greek exports and reduce imports?

      All prices and wages would be converted and re-denominated in dollars on a 1:1 basis.

      The dollar won’t go into a free fall. And Greece would start breathing again.

      Stephan: what would happen to debts, including bank deposits, under the parallel currency system? Would depositors still have access to their euros, or would they have to accept conversion into the new drachma at the prevailing free market exchange rate?

    16. Minor note: Belgium is not all that large (11M people, vs 40M in Spain). But Brussels is the unofficial capital of the EU, as well as home to NATO. The steady flow of government expenditures, the central location of the country, and the lack of a housing bubble (or at least it wasn’t noteworthy in comparison) are among the reasons why it is not considered likely to either default and/or leave the Euro despite having a debt-to-GDP ratio of 1 (or 100% if you like the extra zeros).

    17. ” The “neodrachma” would have to compete with the euro coins and notes prevalent in Greece”

      I thought you said it would have no foreign currency?

      Greece will not lose access to their markets. That is very simply scaremongering. Traders don’t give a stuff what currency is being used. They care about getting hold of Feta cheese and making a profit.

    18. Thanks, Bill;

      I have wondered about this bit, so it was very helpful to see it spelled out so succinctly:

      “To be fully sovereign in its own currency a government has to have a monopoly over its issuance and float it freely on foreign exchange markets.

      The latter requirement frees domestic policy from having to defend the exchange rate. Under fixed exchange rates, monetary policy becomes tied to maintaining the parity (by buying and selling local currency in foreign exchange markets to prevent any excess supply or demand occurring). Fiscal policy then cannot push the economy to capacity if the external sector is in deficit. This is because monetary policy would be continually contracting local demand (by buying currency and taking it out of the economy and pushing interest rates up).”

    19. Bill, I don’t know whether it would be a good idea were the EZ to collapse with all the socio-political ramifications that would necessarily bring in its train. A Martian coming to Earth and looking at the workings of the EZ would see that it doesn’t work when things go wrong. But this same Martian might consider reform of the system along lines suggested by yourself and others before jettisoning it altogether. A reform of the system does not involve any conceptual difficulty; the real difficulty is getting certain vested interests to accept what needs to be done. What is strange is that those same vested interests that take a negative view of reform do not see that such a reform might just be in their own interests in the long run. And given the system of inheritance that is operating and which is unlikely to be overthrown anytime real soon, the long run would, therefore, not necessarily militate against supporting the short run with its attendant difficulties. By these vested interests, I do not just mean politicians whose viewpoint is generally on the short run – I mean whose whom many of them really represent. And, unfortunately, this isn’t usually you or me.

    20. Neil: physical money is a very little part of internal money. Citizens would still have their euro notes, but how much of a typical firm “money” is held in notes and coins? very little.

      Typically, people will stash their euro notes and try to exchange their neodrachmas notes into euro ones.

      And they will also flee the banks (understandably, since they have lost a good chunk of their savings) forcing the central bank to increase lending/or to increase interest rates to very high levels..

      Importing firms will be starved of foreign currency, and (absent help from IMF and without credit from their sellers) they will have lots of trouble importing goods. And exporters of good will keep their earnings abroad (out of fear of a broke internal financial system)

      And traders wont sell their oil or medical suplies to Greece in exchange for Feta cheese. They will demand hard money, not some monopoly money just printed.

      The comparison between a “Greece after Euro” and Iceland is unfair IMO. Best comparison is with a seceding Scotland or Alabama creating their new currencies.

    21. The relationship of international indebtedness to the degree of trouble can be easily seen by looking at the ratio of net overseas assets to gdp.

      Here are the numbers:

      Ireland: -130%, Portugal: -108%, Greece:-98%, Spain: -87%, Estonia: -73%, Slovakia: -37%, Italy: -17%, Cyprus: -10%,
      France: -6%, Austria: -1%, Finland: +7%, Malta: +14%, Netherlands: +20%, Germany: +42%, Belgium:+43%, Luxembourg:+96%

      On the other hand, public debt to gdp in decreasing order is:

      Greece: 143%, Italy: 119%, Belgium: 97%, Ireland: 96%, Portugal: 93%, Germany: 83%, France: 82%,
      Austria: 72%, Malta: 68%, Netherlands: 63%, Cyprus: 61%, Spain: 60%, Finland: 48%, Slovakia: 41%, Slovenia: 38%, Luxembourg: 18%, Estonia: 7%.

      I have used the 2010 gdp and the last updated net international investment position (such as Q4 2010). The excel file with the data collected by me with links to sources is here:

      http://dl.dropbox.com/u/16533182/Euro%20Zone%20Stock-Flow%20Ratios.xls

    22. “Life will be difficult then but the adjustment mechanisms that would then be available to the government (floating exchange rate and currency monopoly) are more people-friendly (capable of increasing jobs and income) than the way they are currently pursuing the problem (internal devaluation and demand contraction).”

      What would happen to interest rates? Was the main reason Greece joined the euro to get lower interest rates (and eventually high debt levels)?

    23. Dear Bill

      As I see it, if Greece wants to leave the EMU, it will have to do it by surprise. It would have to be done in the following order.

      1 – On Sunday, the Greek government announces that next week the banks will be closed and that the drachma will be reintroduced and that it will be worth 70 euro cents.

      2- During the week, all bank deposits will be converted from euros to drachmas.

      3. A law will be passed that provides that all contracts between Greek citizens or legal persons will still be valid but will now be denominated in drachmas instead of euros.

      4 – Another law will stipulate that all euro debts of the Greek government will be converted into drachma debts.

      Regards. James

    24. Regarding India from – STATE BUDGET: VARIOUS COMPONENTS

      STATE REVENUE RECEIPTS:

      State revenue receipts are, as stated earlier, those receipts for which the State has no re-payment liability and which are used to finance items of revenue expenditure. They consist of State tax revenues, non- tax revenues and grants from the Central Government.

      Revenue sharing is a built-in feature of the Indian fiscal scene. The Indian Constitution assigns to the State and Central Governments specific expenditure responsibilities – Irrigation, Power, and Agriculture, among others, are the sectors of State responsibility, while Defence, Posts and Telegraphs, Railways etc. fall in the Center’s domain.

      Similarly, a breakdown has been made in the case of tax revenues, where many taxes, in the interests of efficiency and uniformity, are assigned to the Central Government and they are States enjoined from taping these sources.

      Share in Central Taxes represents the automatic revenue sharing, known as devolution, which all States receive. The States receive percent of the net tax revenues of the Centre. The proportion, in which these taxes are to be shared between the Centre and the States and amongst the States, is determined by the Finance Commission, a statutory body.

      State Expenditures:

      Expenditures are classified under two headings:

      a) revenue expenditures ; and
      b) capital expenditures.

      Broadly speaking, the terms ‘revenue expenditures’ and ‘current expenditures’ are used interchangeably just as the terms ‘capital expenditures’ and ‘investment’. The correlation, however, is not exact. There is some investment expenditures on revenue account (basically capital expenditures), which are required for carrying out general administration of the State, such as housing for civil servants. Likewise, current expenditures shown up on the capital account. Formally, the difference between revenue and capital expenditure is determined on the basis of whether the expenditures are financed from revenue or capital receipts.

      Plan expenditures may be either revenue or capital expenditures, since the expenditures of a non-capital nature are financed through Plan during the Plan period (they become Non-Plan committed expenditures at the termination of the Plan); but they are always “developmental”.

    25. Eddy, you say that people will refuse to use a putative neo-Drachma and so it won’t retain any value. Can you tell us of any examples of currency failure when the currency was free floating , issued in appropriate amounts and tax was collected? Comparisons with Argentina, Brazil, Malaysia etc would suggest that a suprise conversion of all euro denominated Greek debts and financial assets into neo-Drachmas might lead to an almost immediate massive devaluation (say 50%+). But then people left with neo-Drachma financial assets would have no reason to abandon them as the damage would already have been done. Tourists would choose Greece rather than say Spain because prices would be cheap. Solar energy developers would likewise choose Greece rather than say Spain. Greece would be the place for multinational commpanies to set up factories for the european market. Oil would cost twice as much and that would hurt but not hurt as much as the current attempts to reduce take home pay by the equivalent amount. The most important thing would be to have the EU trading partners fully co-opperative. German and French Banks would need to be sacrificed and a domino effect would probably make all of the other euro countries have to revert to individual currencies.
      The other alternative would be to have a European super-state. My gut feeling is that that would squander what is valuable about European diversity. I’m really intrigued by the Indian example as different Indian states seem to have such different character and yet seem to have so little financial independence.

    26. Ramanan

      “The relationship of international indebtedness to the degree of trouble can be easily seen by looking at the ratio of net overseas assets to gdp.”

      Your good… thanks. I’ve enjoyed your comments for a while now.

      Would you consider ever doing some articles on the macro/political/social position in India? Perhaps Bill could host them on his blog?

      From an Australians point of view we share some common features derived from the British, but, India is also a puzzle to most Australians.

      cheers
      Paul

    27. Ramanan, with countries that have free floating currencies, does net international indebtedness still have such an important effect or does the free floating nature prevent the net indebtedness from building up in the first place? I guess the USA is the big exception because it is the reserve currency but have any free floating not reserve currencies ever developed an Irish level of net indebtedness? If Ireland were to convert all of its currency and debts from Euros to new-Irish£ then I guess their net indebtedness would evaporate.

    28. Paul,

      Thanks.

      I don’t know of good articles about India but the reason I mentioned it was to highlight the diversity. There’s a joke on how the country is run – the humour gets a bit lost in translation : An atheist visits India and goes back and tells his friend that he is no longer an atheist. When asked why he says that he had visited India and couldn’t figure out how the country is managed and concluded that only God could have run India.

    29. stone,

      The United States’ net international investment position is around minus 25% of gdp. In spite of having run huge trade deficits, its a bit low because of large income received from abroad and also due to large revaluations of assets held abroad. Also its net IIP was around +30% of gdp long back (around 1970).

      Amongst the nations with free floats the ones with high negative numbers are Australia and New Zealand. Australia’s number is around minus 59% and that of New Zealand is minus 81%

      It helps having liabilities to foreigners in your own currency since capital losses is avoided due to currency movements. It helps more if claims on foreigners are in foreign currency, as depreciation increases the value of those assets.

    30. What’s the difference, operationally, between ECB and FED?

      I mean, the issue of government bond by Treasury has the same operational meaning?
      To drain reserves ecc ecc, or they issue bond before because they’re revenue constraint?

      Thanks

    31. Paul / stone – you both seem taken by Ramanan’s statement “The relationship of international indebtedness to the degree of trouble can be easily seen by looking at the ratio of net overseas assets to gdp”. But let’s be clear: whilst the data here only supports the idea that “degree of trouble” applies in fixed FX rate environments, Ramanan claims that an excessive NIIP can lead to a crisis in ANY country.

      This is obviously something of an attack on MMT, as MMT would (I think) say that valuation effects would make FX shifts stabilising rather than destabilising events. The analogy would be a high price-earnings ratio: just as a PE above 50 for an equity index means prices are more likely to fall, the more they fall, the more investors will conclude the market is cheap and will start buying.

      Bill has I believe challenged Ramanan to substantiate his claim as it applies to monetarily sovereign govts. I believe Ramanan has declined on the basis that there aren’t sufficent data points – but that he stands by his claim that there might be a USD crisis.

    32. Ramanan “Amongst the nations with free floats the ones with high negative numbers are Australia and New Zealand. Australia’s number is around minus 59% and that of New Zealand is minus 81%”

      -Is it fair to say that at the moment Australia and New Zealand are not suffering as a result and so the issue is whether they are storing up trouble? The comparison that Anders gave with an over-valued stock market does seem to fit. Momentum trades based on currency issues could lead to distortions and waste. It seems like everything else in that an excess of financial assets in comparison to the real economy leads to financial assets having no scarcity value and so rather than being used judiciously they get sloshed around creating and chasing price swings???? In principle in a rational world it would make sense to only buy undervalued stockmarkets or currencies but in practice people chase up the price of whatever is rising in price then flee whatever is falling.

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