Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Baseline Scenario: It's Not About Greece Any More (By Peter Boone and Simon Johnson)
... This new program calls for a total of 11% of GDP in terms of "fiscal adjustments" (i.e., reduction in the budget deficit; now meaning government spending cuts mostly) in 2010, 4.3% in 2011, and 2% in 2012 and 2013.  The total debt to GDP ratio peaks at 149% in 2012-13 before starting a gentle glide path back down to sanity.

... The program announced last weekend assumes Greek GDP falls by 4% this year, then by another 2.6% in 2011, before recovering to positive growth in 2012 and beyond.

The problem is that the deficit reduction is incompatible with the GDP projections. Who believes reducing Greece's deficit by 11% by cutting government spending will result in only a 4% GDP drop?
This new program is honest enough to show why it is unlikely to succeed.  Daniel Gros, an eminent economist on euro zone issues based in Brussels, has argued that for each 1% of GDP decline in Greek government spending, total demand in the country falls by 2.5% of GDP.  If the government reduces spending by 15% of GDP - the initial shock to demand could be well over 30% of GDP.  Obviously this simple rule does not work with such large numbers, but it illustrates that Greece is likely to experience a very sharp recession - and there is substantial uncertainty around how bad the economy will get.


The politics of these implied budget surpluses remain brutal.  Since most Greek debt is held abroad, roughly 80% of the budget savings the Greek government makes go straight to Germans, French and other foreign debt holders (mostly banks).  If growth turns out poorly, will the Greeks be prepared for ever tougher austerity to pay the Germans?  Even if everything goes well, Greek citizens seem unlikely to welcome this version of their "new normal".

A new bailout of French and German banks by Eurozone governments under the guise of bailing out Greece, so the Greek people not the banks in core Euro countries are the target of populist anger.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 10:05:22 AM EST
(h/t Drew)

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 10:06:26 AM EST
[ Parent ]

A European Energy Clearing Union.

Common currencies of Units issued by producers and redeemable in electricity and/or carbon-based fuels.

No central issuer, but an accountable Monetary Authority.

A € value standard consisting of an absolute amount of energy.

A framework of trust consisting of a mutual guarantee by EU members.

Payments made by € users for service provision and for the use of the guarantee.

An 'Energy Pool' investment/default fund to finance (through interest-free loans denominated in energy) the transition to renewables - funded by a levy on carbon Unit transactions.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu May 6th, 2010 at 10:43:43 AM EST
[ Parent ]


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