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What is the point of the euro?

by tyronen Wed May 5th, 2010 at 06:46:34 PM EST

The austerity measures being forced on Greece are awful.  Even worse, they will not work.  Lower wages mean lower demand, which will only depress government revenues, which will add to Greece's deficit.

Nor can a deficit of Greece's size be eliminated by taxing the wealthy alone.  Not if only the wealthy of Greece are targeted.  

There is an easier way - devalue the currency.  Oh, yeah - Greece doesn't have a currency.  Why not?


Joseph Stiglitz is losing patience with the euro:

Europe has no way of helping those countries facing severe problems. Consider Spain, which has an unemployment rate of 20% - and more than 40% among young people. It had a fiscal surplus before the crisis; after the crisis, its deficit increased to more than 11% of GDP. But, under EU rules, Spain must now cut its spending, which will likely exacerbate unemployment. As its economy slows, the improvement in its fiscal position may be minimal.

For the eurozone to make sense, all automatic-stabilizer programs - unemployment insurance, labour market training, wage supplements, progressive income taxes - should be in the hands of the EU, not national governments.  If Europeans cannot bring themselves to do that, they should abandon the euro.  It no longer makes sense to continue this curious half-a-loaf of monetary integration but fiscal and political separation.

As Paul Krugman puts it:

Now that the money is no longer rolling in, those countries need to get costs back in line.

But that's a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates -- e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won't accept inflation, deflation it is.

The problem is that deflation -- falling wages and prices -- is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment.

That is to say, it's not enough to tax the Greek wealthy.  You have to tax the wealthy all over the eurozone to fund Greek social programs - basically, you need a continent-wide income tax funding continent-wide social programs.  Europe would really need to be a single country, not just have a single currency.

And indeed, this was probably the hope when the euro was introduced - that it would nudge countries towards greater political integration.  In that respect, it has failed.  The people of Greece are now its first victims.

Display:
This would all be a lot easier if the ECB were not crippled by statute.
Article 123
(ex Article 101 TEC)
1. Overdraft facilities or any other type of credit facility with the European Central Bank or with
the central banks of the Member States (hereinafter referred to as `national central banks ') in favour of
Union institutions, bodies, offices or agencies, central governments, regional, local or other public
authorities, other bodies governed by public law, or public under takings of Member States shall be
prohibited, as shall the purchase directly from them by the European Central Bank or national central
banks of debt instruments.
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the
supply of reserves by central banks, shall be given the same treatment by national central banks and
the European Central Bank as private credit institutions.


The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Wed May 5th, 2010 at 07:24:25 PM EST
The Euro is a step forward to unified world government.

The problems now facing countries like Greece will not be solved by short-term ideas like Krugman postulated (which got him a HUGE kickback from his commenters.)

There is no real Greece, England etc, except in the fevered and foolish minds of the general populace.

IF we're all humans, then labor must be free to follow capital, and gross inequalities must be severely discouraged. That's the real road...

Align culture with our nature. Ot else!

by ormondotvos (ormond.otvosnospamgmialcon) on Thu May 6th, 2010 at 01:16:34 AM EST
Aren't there any European economists writing about this?

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 03:59:07 AM EST


The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Thu May 6th, 2010 at 04:54:25 AM EST
[ Parent ]
Sanity from Germany!

Feynsinn » Sie können doch nicht den Flassbeck zitieren

Flassbeck: Das ist vollkommen falsch. Man hat eine Währungsunion gemacht mit einem Inflationsziel von zwei Prozent. Das ist eine implizite Verpflichtung, die Löhne ungefähr zwei Prozent über der Produktivität zu halten. Deutschland ist massiv darunter geblieben und hat damit sozusagen eine Deflationspolitik betrieben, ohne es den anderen zu sagen. So wurde Deutschland fast zum alleinigen Gewinner, während fast alle anderen darunter leiden. Das hat nichts mit Sparen zu tun: Das war und ist ein klarer Verstoß gegen den Geist der Währungsunion.

by generic on Thu May 6th, 2010 at 05:14:25 AM EST
[ Parent ]
translate.google.com's translation:

Flassbeck: This is completely false. It has made a monetary union with an inflation target of two percent. This is an implicit obligation to keep the wages to about two percent higher than the productivity. Germany is still solid underneath and has operated a policy of deflation, so to speak, without telling the others. Thus, Germany, almost the sole winner, while almost all others suffer less. This has nothing to do with saving: This was and is a clear violation of the spirit of the monetary union.

fairleft

by fairleft (fairleftatyahoodotcom) on Thu May 6th, 2010 at 10:50:53 AM EST
[ Parent ]
over here.
by santiago on Thu May 6th, 2010 at 10:11:22 AM EST
[ Parent ]
For instance: Is the euro a failure? (Gilles Saint-Paul, 5 May 2010)
Thus it is somewhat disturbing that we are now asked to pour money into Greece to "save the euro" (while the British, who have no stake in the euro, are spared that burden). Besides the fact that apart from Germany, the other large Eurozone economies (France, Italy, and Spain) are barely in a better shape than Greece, and besides the moral hazard effects of the intervention, it makes little sense to prolong a monetary regime which is actually one of the reasons why those countries are in trouble.

Furthermore, in a typical adjustment program, shock therapy aimed at stabilizing public finances must be associated with policies that make it possible for the economy to start growing again - a necessary ingredient if one wants the program to be politically acceptable or just to fulfil its objectives. After all, jobs are needed for the people to tolerate the hardship imposed on them, and fiscal receipts are needed for the government to avoid fresh insolvency problems five years down the line.

In the case of Greece an important obstacle to recovery is the competitiveness problem. If Greece was not part of the European Monetary Union an IMF adjustment package would presumably have involved a sharp depreciation of the currency (if it had not happened before under the sheer pressure of the markets). By insisting that Greece remains in the Eurozone, the other member countries are greatly reducing the success probability of their plan.



The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 10:29:49 AM EST
[ Parent ]
If Greece was not part of the European Monetary Union an IMF adjustment package would presumably have involved a sharp depreciation of the currency

Judging by the track record of the IMF in Russia and Indochina, I call wishful thinking on that bit.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 6th, 2010 at 11:34:31 AM EST
[ Parent ]
First the central bank burns its foreign reserves in a futile attempt at protecting the currency, providing a narrow window of opportunity for well-connected people to move their assets into hard currency (the downward exchange rate pressure from this is compensated by some of the foreign-reserve burning). Then massive devaluation happens, and then the IMF comes in.

The devaluation is not part of the IMF package, but it does take place.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 11:37:40 AM EST
[ Parent ]
In Russia, at least as Stiglitz tells the story, the IMF came in before the devaluation and used dollar-denominated loans to prop up the overvalued currency, thereby extending the window of opportunity for asset stripping.

It boggles the mind how anybody at the IMF could possibly have though that using borrowed dollars to prop up the exchange rate could even be within shouting distance of sanity, let alone a good idea.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 6th, 2010 at 11:50:47 AM EST
[ Parent ]
they don't necessarily do so. Greek (and Spanish and Portugese and Irish, et c) wages went up way too high over the past decade of a crdit-fuelled boom in each country. Now, it is time for those wages to come back in line with core-EU wage growth (say to levels in France and Germany).

Lower the wages, you make the country's exports cheaper and more competitive abroad, increasing demand for them. Make other country's imports more expensive via negotiated lower industry- or country-wide wage cuts increasing likelihood of demand substitution of domestically-produced goods, also increasing (relative) demand for those goods.

Lower wages can indeed mean higher demand, not lower.

The key is for wage concessions to be progressive, to fall most heavily on higher-wage earners, thereby resulting in a higher level of income and thereby social cohesion, which you can measure via the Gini coefficient (among other measures)...

Can Greece do this? No, probably not, it requires real socialism, not the bland Pasok (tm) brand of liberal social democratism. But, in any event, there is nothing inherently negatively correlated in the  wage/demand relationship. And, inflating ones' self out of a mess, as Italy and Greece spent the better part of the post-war era doing, while sometimes efficient, more often than not is a politically expedient way to ensure the same inequalities (economic, political, social) remain in place all the while giving all classes a semblance of moving forward. It is indeed important for all to have a job; it is equally important that all have a legitimate shot of equality for self and for children.    

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu May 6th, 2010 at 04:53:43 AM EST
I am on board with all these arguments about the need for relative deflation until we get to claims such as Greek (and Spanish and Portugese and Irish, et c) wages went up way too high over the past decade of a crdit-fuelled boom in each country.

Considering 58% of Spanish wage earners made less than €1100/mo (gross) in 2007, and that the serious people still claim Spanish workers are overqualified...

Something is not quite right here.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 05:13:43 AM EST
[ Parent ]
hav been stagnating for 2 decades. There has been massive redistribution of wealth within Germany (a good part to Eastern Germany, a good thing), and a weakening of the position of the Western German workers, which means that the "core euro" reference is out of whack too.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Thu May 6th, 2010 at 05:40:10 AM EST
[ Parent ]
It would be interesting if the Economic policymakers of the Eurozone got their collective heads out of their neoclassical arses before all hell breaks loose.

I don't know what they're telling each other privately now, but they sounded pretty self-satisfied about fiscal austerity just just 10 weeks ago (when the Greek Tragedy was already unfolding).

We also have to acknowledge that there is a lot of uncertainty regarding the short run effects of fiscal adjustment. There is an extensive literature examining this issue and different studies have yielded quite different results. But broadly speaking, what we can ascertain from this literature is that the short run costs of fiscal adjustment are likely to depend on a variety of conditions. Notably, these costs are likely to be more limited:

  • If the fiscal starting position is precarious and the adjustment is credible;

  • If financial markets react by lowering long-term interest rates;

  • If households have correctly understood the need for fiscal adjustment and have factored this into their spending decisions; in other words, if households are - at least partly - "Ricardian";

  • and if monetary conditions are accommodative.

This last condition touches on the very subject of today's conference: monetary and fiscal policy interactions. And in certain respects, it has to be acknowledged that such interactions are particularly challenging for the euro area.
Meanwhile, the ECB's own out-of-thin-air™ definition of price stability
"Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%."
is not up for discussion, just as the SGP's outlandish macroeconomic assumptions aren't.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 06:20:43 AM EST
[ Parent ]
It's not out of whack insofar as it is highly politically relevant.

French wages have been pretty tame too, especially relative to Greece's and Ireland's...

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu May 6th, 2010 at 10:13:39 AM EST
[ Parent ]
I seem to have misspoke about Spain, having remembered a graph Jérôme passed aournd a while back (or maybe it was in Krugman's blog) but the statistics about wage growth are pretty starkly different on the periphery than in the core : (see nominal and real wage growth tables).

Greece and Ireland had by far the highest nominal and real wage growth in the past decade relative to other Eurozone countries, with Portugal not far behind. The same is true of the previous decade. Core Europe's wage growth is far lower than the periphery, as the periphery enjoyed a credit-filled boom.

There are multiple solutions to the problem this causes for each of these three country's Current Accounts issues, one of which would be  direct aid through a strong EU to the periphery (obviously not politically palatable) but if there's no underlying productivity growth (and I don't think there was, these were banking and property bubbles largely) there's not rationale for relative wage growth.

The key is to make the top end pay, but unless the EU is strong enough to bite the bullet and provide direct employment aid to the periphery, you either manage deflation, suffer deflation, or engage in inflation, the latter involving default/debt restructuring and likely ejection from the Eurozone....

I for one am still trying to figure out how Greece was allowed in the Eurozone in the first place. In private business, a due diligence failure of that magnitude would be career-ending. I wonder how the ECB and the EC are handling this egregious failure of due diligence...likely, failing someone upwards, as usual.


The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu May 6th, 2010 at 10:12:34 AM EST
[ Parent ]
I seem to have misspoke about Spain, having remembered a graph Jérôme passed aournd a while back (or maybe it was in Krugman's blog)

There is a graph in Krugman's Spanish Doldrums (March 14, 2009) which he basically uses to argue that Spain needs 20% relative cost deflation between itself and Germany.

Now that boom is over. But it left as its legacy a sharp rise in Spanish costs and prices relative to the rest of the euro zone (the chart below is Spanish unit labor costs in manufacturing relative to the EZ average, but it doesn't much matter which measure you use):
There's something really wrong about 20% higher than average labour costs with 58% of the population making less than €14k a year (gross), and I'd like to know where Spain's "labour costs" are going because it's not wages.
The key is to make the top end pay
If you see the baseline scenario post in a top level comment, what we're getting is Greece being gutted for the purpose of serving as a conduit for government funds from the rest of the Eurozone going to bail out the French adn German banks who are Greek creditors.

It is apparent, given the public debt figures in the various countries over the past 10 years, that what has been going on for 10 years is that German banks have lent money to peripheral economy consumers to buy German cars, as well as to German retirees to buy hiliday homes on the Mediterranean, fuelling an unqualified-labour and land-value speculative boom in the peripheral economies. Now the banks are going to destroy Germany's Eurozone export markets in order to collect.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 10:22:02 AM EST
[ Parent ]
I am wondering, you know how many Spaniards are not wage laborers but are, like is beginning here in France, independent workers.

I am wondering if this is a factor which distorts Spanish wage statistics.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu May 6th, 2010 at 10:32:00 AM EST
[ Parent ]
these data were from the Tax Agency (Agencia Tributaria) so presumably they don't distinguish whether "work income" comes from wages or from being self-employed. Of course, Spain also has a large underground economy, and many of the independent workers, liberal professionals, etc, misrepresent their income (and evade VAT by taking cash payments without receipts).

However, it has also become relatively common for a firm to take on a full-time worker but to force them to register as self-employed, so that all the social security overhead costs are taken from the worker's gross pay. That only adds to the sense that the "labour costs" cannot be that high, since companies are allowed to get away with offloading the overhead on the workers.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 10:40:30 AM EST
[ Parent ]
I don't understand that paper.

Firstly, are they using median or average wages? Insane bubbly compensation in finance will distort both. So it's more useful to compare wage growth by sector, splitting off the financialised economy from the rest.

Secondly, there seems to be some confusion about whether wage growth is a good thing or a bad one.

Which leads to an interesting question - if growth and producvitity are good but wage growth is bad, where does the money go?

Finally, isn't 'wage growth' really just harmonisation, and exactly what you'd expect in a common trading area? Considering that the periphery was always less marginally dynamic than the core, I don't see why wage growth would be considered a problem.

I suppose the implication is that wage increases aren't really affordable - but then you'd expect the ECB to say that for ideological reasons.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 6th, 2010 at 10:39:13 AM EST
[ Parent ]
Table 9 on page 29.
by Colman (colman at eurotrib.com) on Thu May 6th, 2010 at 11:06:00 AM EST
[ Parent ]
Yes, the periphery had high wage growth, but from a very low level - so you end up with this: Ireland bang in the middle of the Eurozone (per hour), Portugal and Greece and Spain way down the bottom. There's a significant element of catch-up.

by Colman (colman at eurotrib.com) on Thu May 6th, 2010 at 11:03:41 AM EST
[ Parent ]
How do the wages compare with productivity?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu May 6th, 2010 at 11:13:45 AM EST
[ Parent ]
How do the wages compare with local living costs?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 6th, 2010 at 11:15:37 AM EST
[ Parent ]
by afew (afew(a in a circle)eurotrib_dot_com) on Thu May 6th, 2010 at 11:25:29 AM EST
[ Parent ]
Very good, in the Irish case, at the time, if you use GDP.

Ok, in the Irish case, at the time, if you use GNP.

Currently? Who knows? Wage and compensation cuts are helping GNP spiral downwards (though it seems to be bottoming out for the moment) so it probably doesn't look so good right now. On the other hand, the economic studies don't mention wages as being a problem for competitiveness until the executive summaries, as far as I can make out.

by Colman (colman at eurotrib.com) on Thu May 6th, 2010 at 11:19:51 AM EST
[ Parent ]


"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu May 6th, 2010 at 12:03:48 PM EST
[ Parent ]
Can we have a source for that?
by Colman (colman at eurotrib.com) on Thu May 6th, 2010 at 12:07:05 PM EST
[ Parent ]
Source of the graph: The crisis in Spain: So hard to bend | The Economist
In the euro's first ten years, output per worker rose by an average of 0.2% a year. In some years it fell even as wages grew quickly, which chipped away at Spain's cost competitiveness (see chart).


"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu May 6th, 2010 at 12:09:59 PM EST
[ Parent ]
Oh, a massive average(?) increase of 5%, in the best of years.

What was inflation doing during this time? What was the property market doing? And as for stocks:

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 6th, 2010 at 12:42:01 PM EST
[ Parent ]


"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu May 6th, 2010 at 12:07:54 PM EST
[ Parent ]
Source: Spain: economic adjustment in a strait-jacket - econoblog101
Remember: this is only productivity. Germany had falling real wages for the last 8 years or so while wages in Spain were growing (see graph from The Economist below)


"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu May 6th, 2010 at 12:13:00 PM EST
[ Parent ]
Are you arguing that the Greeks having wages 2/3 those of the French is the problem here?
by Colman (colman at eurotrib.com) on Thu May 6th, 2010 at 11:10:39 AM EST
[ Parent ]
after 25 years telling us how devaluations were a bad, bad, bad process, leading to lower long term competitiveness, declining standards of living, beggar-thy-neighbor policies, we're now being told by the same economists that it's THE solution, and that it's apparently painless.

The whole point of a devaluation is still to stuff the poor (those who get their income in devalued currency, rather than those that have assets that can keep their value in hard currency terms)

And I still fail to see how this is going to lead to any breakup of the euro, even if Greece defaults. I see Portugal and Spain being asked to pay higher interest rates to borrow for a while, but what other practical consequence would it have?

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu May 6th, 2010 at 05:38:29 AM EST
I think it's highly unfair to rank Stiglitz and Krugman among "he same economists". Or to imply that they describe deflation as painless.

Or even as THE solution. All in all, they would probably advocate greater fiscal integration. But that would not work too well with the current German memes either.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu May 6th, 2010 at 06:26:51 AM EST
[ Parent ]
Everyone thinks¨"growth" sounds good.

"Stability" is pretty nice, too.

So is "fiscal responsibility".

And "single market freedoms".

And "sovereignty".

And "rising living standards".

And "low taxes".

And "quality public services".

And "a social safety net".

The trouble is having all of these things simultaneously seem to be inconsistent with any view of macroeconomics which is not a fairy tale, in the line of Veblen, Keynes, Fisher, Minsky and Keen.

Oh, darn, I'm sounding like an economics crackpot again...

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 06:35:39 AM EST
[ Parent ]
I agree with what you say.
But the way I read these two (Krugman and Stiglitz), they seem to me to be aware of the fact that they can't all go together -or, actually, are good per se (certainly growth, single market freedoms and low taxes are not an unqualified positive).

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Thu May 6th, 2010 at 07:08:17 AM EST
[ Parent ]
The current EU crisis is political - all about sharing losses.

The problem is that, as we know, sharing is only possible when economic growth is sufficient to mask the extent to which the sharing is unfair. In the middle of the biggest economic crisis since the 1930's, people are in each-man-for-himself mode and the EU has deliberately downplayed the political aspects of European integration for the past 15 years.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 07:18:45 AM EST
[ Parent ]
This is true. Why it's true is not explained by politics or economics, but cognitive science and history.

"sharing is only possible when economic growth is sufficient to mask the extent to which the sharing is unfair"

You're really talking about how rich people capture the memes people operate under.

Well, maybe the Internet blogs will make a revolution of redistribution. Not likely, tho.

Align culture with our nature. Ot else!

by ormondotvos (ormond.otvosnospamgmialcon) on Thu May 6th, 2010 at 09:43:28 PM EST
[ Parent ]
after 25 years telling us how devaluations were a bad, bad, bad process, leading to lower long term competitiveness, declining standards of living, beggar-thy-neighbor policies, we're now being told by the same economists that it's THE solution

The dustbin on modern history is truly filled with the ashes of ideas torched by Paul Krugman.

Note the article is from 1999.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu May 6th, 2010 at 06:46:39 AM EST
[ Parent ]
Well, that article clearly points out that the markets forgot for 10 years that the euro is a structurally hawkish currency. There was no reason for Spanish or Greek bonds to cost the same as German ones, and yet they did.

So markets mispriced risk for 10 years and are now panicking. Big f'ing deal. They are panicking over EXACTLY what they warned would be the reality of the euro - spendhrift Southerners and intractable Germans. They were wrong, it's their problem, not Europe's.

And well, yes, Greece should have been a bit less careless in how it spend money it borrowed at unexpectedly cheap rates. It's not because banks throw money at you that you have to burn it.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu May 6th, 2010 at 07:44:26 AM EST
[ Parent ]
How does any of that make Krugman (1) wrong or (2) a flip-flopper on currency devaluation, as you alleged in your first comment?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu May 6th, 2010 at 07:56:42 AM EST
[ Parent ]
I didn't write specifically about Krugman, but if you want to make this specifically about him, you'd have to dig up whatever he wrote on devaluations in the 90s.

From the article you linked to, I note that the "Europe is doomed" theme was already dominant in his writing - you could hardly be more sneeringly dismissive of European than he is.

Whatever Europe does is fucked up is what I read from your link.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu May 6th, 2010 at 08:02:31 AM EST
[ Parent ]
Who specifically were you referencing then?  Stiglitz?  There were only two guys mentioned here, neither of whom have been big pushers of anti-European sentiment over the years (quite the contrary, and you know it as well as I do).

The article is from the '90s.  This isn't some new thing he picked up.

So I take it all criticism of any EU structure is just fools falling prey to the Europe.is.Doomed(TM) meme?  That's what your responses basically suggest.

"The Germans can do no wrong.  We'd all be filthy rich if the rest of the world just ran trade surpluses like they did."

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu May 6th, 2010 at 08:27:40 AM EST
[ Parent ]
There was no reason for Spanish or Greek bonds to cost the same as German ones, and yet they did.
Do I have to remind you of the debt-to-GDP ratios of Germany and Spain over the last 10 years? Let's see. (Eurostat)
      DE    ES
1998  60.3% 64.1%
1999  60.9% 62.3%
2000  60.4% 59.3%
2001  58.8% 55.5%
2002  60.4% 52.5%
2003  63.9% 48.7%
2004  65.7% 46.2%
2005  68.0% 43.0%
2006  67.6% 39.6%
2007  65.0% 36.2%
2008  66.0% 39.7%
2009  73.2% 53.2%
I won't embarrass you with France's numbers. But I will remind you of this
Heads of state and government agreed at the March 2005 Summit to revise the EU's Stability and Growth Pact reform. Under the revised rules, member states must still keep their public deficits under a 3% GDP/deficit ratio and their debts under a 60% GDP/debt ratio.

However, the pact's rules have been made more 'flexible' across a range of areas. For example, member states will avoid an excessive deficit procedure (EDP) if they experience any negative growth at all (previously -2%), can draw on more "relevant factors" to avoid an EDP and will have longer deadlines if they do move into an EDP.

...

In essence, big countries such as France and Germany have won concessions making the pact more 'flexible' in various parts, adding up to a considerable relaxation of the rules. In return, countries such as Austria and Netherlands have won references to "enhanced surveillance, peer support and peer pressure".

The two thresholds - 60% for the debt and 3% for the deficit - remain unchanged.

It's all a farce.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 08:36:41 AM EST
[ Parent ]
It's not a farce.

The EU is the only entity capable of taking on the finance industry. Therefore the finance industry has decided to destroy the EU.

It's not bizarre that it's happening - it's bizarre that the EU 'leaders' are taking the attacks at face value and assuming that this is about fiscal responsibility, or whatever other reason is being used as the pretext du jour. And also that Germany has gotten itself into a position where internal politics have become more influential than long term solidarity.

In reality it's the bully coming over and saying 'I don't like your face' and using it as an excuse to pick a fight. Trying to put on a different face won't help.

It makes no sense to keep believing that the markets are playing by some kind of standard economic rules when the crash of 2008/9 and the subsequent bail-outs proved that they're only in it for whatever they can get, and that the rules will change whenever and however they need to.

And if that means taking down a government or two - all the better.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 6th, 2010 at 08:55:54 AM EST
[ Parent ]
It's not bizarre that it's happening - it's bizarre that the EU 'leaders' are taking the attacks at face value and assuming that this is about fiscal responsibility, or whatever other reason is being used as the pretext du jour. And also that Germany has gotten itself into a position where internal politics have become more influential than long term solidarity.
Neither of these things are bizarre either. Europe's politicians and economic policymakers have either been schooled in neoclassical economics and the efficient market hypothesis, or have been raised in market-worshipping conventional wisdom. They are cognitively incapable of understanding what's going on.

Also, Germany has been making xenophobic noises about the peripheral Euro countries since the 1990s. Now this crisis can be used by them to validate their claims back then that the Euro should not have incorporated the Mediterranean countries. Everyone is glossing over Germany's deficit and debt during the peak of the business cycle in the mid-noughties while unconstitutionally cutting the social safety net, and the fact that they used their muscle at the EU council to avoid being rapprimanded for their excessive debt.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 09:02:46 AM EST
[ Parent ]
In that case Europe really is doomed, because Germany has chosen to identify with the bullies - ultimately at its own expense.

If the Mediterranean countries go, the Eastern European countries will go too, and eventually the markets will pick off the survivors one by one, leaving who knows what.

This is all good news for the neofeudalists but very bad news for everyone else.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 6th, 2010 at 09:16:29 AM EST
[ Parent ]
If the Mediterranean countries go, the Eastern European countries will go too

It appears the Eastern European countries are idiots, too (at least the first-in-class ones which successfully applied neoliberal shock therapy to get into the Euro).

As the Greek government awaits the first tranche of a €110 billion rescue loan, its Socialist counterpart in Slovakia has said it will not immediately contribute its share, citing doubts over Athens' ability to push ahead with necessary reforms.


The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 09:20:56 AM EST
[ Parent ]
In that case Europe really is doomed

I would love to be wrong. But even Jérôme is expecting

the utter humiliation of Germany by the markets


The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 09:23:20 AM EST
[ Parent ]
Not necessarily.

Spain is too big to fail.. no way the ECB allows it. They would buy debt, or do whatever it takes.

Europe is DE, FR, GB, IT and SP... if one falls, the other follow (maybe GB is a little bit more decoupled, but not that much). Therefore the big countries are not interested in accepting the attack.

They could fight over Greece, even Portugal, not Spain or Italy. The real tragedy would be not to take this as a clear warning that further financial integration is necessary.. and that reuglation of the European markets following the same structure of the financial regulation taking shape in the US is necessary here plus a serious reform of the bond market in Europe and credit default swaps in England.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu May 6th, 2010 at 12:35:50 PM EST
[ Parent ]
Is the United States of America making economic war against the European Union?

Money is a sign of Poverty - Culture Saying
by RogueTrooper on Thu May 6th, 2010 at 05:43:40 AM EST
I think it's more like supra-national corporations are making war on all of us.

We all bleed the same color.
by budr on Thu May 6th, 2010 at 07:13:34 AM EST
[ Parent ]
The U.S. has plenty of problems of its own, largely related to China...
by asdf on Thu May 6th, 2010 at 09:55:36 AM EST
[ Parent ]
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 ]
... exchange rate risks at every provincial boundary crossing within the Eurozone plays havoc with planning production systems for fixprice output across provincial boundaries.

The Eurozone needs, at a minimum, an automatic allocation of Euros based on the size of the output gap, allocated to national governments in proportion to population. That would allow the pro forma national governments to maintain their safety net programs while working out a Eurozone-wide basic safety net.

Of course, for the corporate neofeudalists, the fact that the Eurozone is crippled as a monetary region without a corresponding fiscal authority is a virtue ... its faults are only faults when viewed through the prism of public interest, but are virtues when viewed through the prism of relative power of transnational corporations.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu May 6th, 2010 at 11:16:31 AM EST
The Eurozone needs, at a minimum, an automatic allocation of Euros based on the size of the output gap, allocated to national governments in proportion to population.

What, a cap-and-trade Euro bond market?

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 11:34:53 AM EST
[ Parent ]
Who said anything about marketed bonds? The ECB creates Euro reserves in accounts of the treasuries of the member states. Done.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu May 6th, 2010 at 12:22:06 PM EST
[ Parent ]
I guess that isn't buying debt or giving the governments an overdraft, is it?

Brilliant.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 06:14:31 PM EST
[ Parent ]
Some asset would have to be created to match against the liability. Of course, when a reserve banking system directly creates reserves, that is normally by dictating to the Treasury to issue bonds which the reserve bank holds. Where the reserve bank refunds income on bonds over interest back to the treasury, there is no net financing cost.

So they could be "warrants" from the EU or alternatively from the states whose accounts have been credited.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu May 6th, 2010 at 08:20:24 PM EST
[ Parent ]
... if it is an automatic ratio based on an automatic amount of purchasing power created, no, its not an overdraft.

The "need" to "borrow" at the level of the monetary authority is, of course, purely a decision made by the monetary authority, provided that there are unemployed resources to be mobilized.

That is, the role of the sale of bonds is the same as the role of taxes, to drain purchasing power from the private sector to essential government spending to take place without a demand-pull inflationary outbreak. Under current conditions, there's no danger of demand-pull inflation, so there's no need to sell bonds to drain purchasing power.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu May 6th, 2010 at 08:24:37 PM EST
[ Parent ]
Is this the time to talk about grey markets starving governments? Tax avoidance as a national virtue?

Governments don't work when starved. Just as corporate parasites can ruin economies.

Align culture with our nature. Ot else!

by ormondotvos (ormond.otvosnospamgmialcon) on Thu May 6th, 2010 at 09:54:59 PM EST
[ Parent ]
that the if Greece were to abandon the Euro and re-initiate its own currency and monetary policy that it would cause all kinds of logistical and credibility problems for banks throughout Europe, leading to the probable collapse of the EMU and euro. I'm skeptical of that argument, but does anyway think it has validity, and why? It seems to me that it might be a software headache for IT departments to worry about from a technical standpoint, somewhat like the drills IT departments have to go through when mergers occur, but that it really would be a much more trivial issue than people are saying it would be.
by santiago on Thu May 6th, 2010 at 05:05:28 PM EST
No matter what, economists will be saying [Europe.Is.Doomed™ Alert] .

Greece would sooner be allowed to default on its debt and stay in the Euro than be forced out or choose to restart its own currency, IMHO.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 06:23:28 PM EST
[ Parent ]
The problem isn't whether or not Greece defaults. One way or another it has already past that post. The problem is how Greece continues to provide for the desires of Greek citizens to enjoy the comparable levels of social welfare benefits that citizens of the wealthier EU nations do.  (For example, right now, public spending in Greece is just 40% of GDP, about the same as the US, which is the lowest, or near the lowest, in the industrialized world.)

It appears almost impossible for that to ever occur, given the structure and resources available to the Greek economy relative to what other eurozone economies enjoy, without significant transfers of wealth from richer states to Greece, or without Greece being able to implement its own monetary policy. It's a contradiction embedded within the EU framework that requires a solution, and that solution is likely going to injure the interests of at least some powerful classes in the wealthier countries.

by santiago on Thu May 6th, 2010 at 06:49:59 PM EST
[ Parent ]
I'm beginning to NOT trust these GDP figures at all, AND I'm beginning to not listen to arguments based on them...

Align culture with our nature. Ot else!
by ormondotvos (ormond.otvosnospamgmialcon) on Thu May 6th, 2010 at 09:57:05 PM EST
[ Parent ]
Well, the Greek budget is about 120 billion, and GDP is 250 billion, but we can't assume that 120 billion gets spent on social services. There are a lot of other costs, such as debt service and armaments and a variety of other things besides social services.
by Upstate NY on Fri May 7th, 2010 at 12:32:21 AM EST
[ Parent ]


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