Greek Lessons for Italy and Spain: Papaioannou and Vayanos Post author By Philip Lane Post date August 11, 2011 This Bloomberg article is a useful update on the Greek situation. Categories In Uncategorized 14 Comments on Greek Lessons for Italy and Spain: Papaioannou and Vayanos ← Trading Volumes in Irish Bonds → Swiss Central Bank Considers a Peg to the Euro 14 replies on “Greek Lessons for Italy and Spain: Papaioannou and Vayanos” Cross out ‘Greece’ and insert ‘Ireland’ in the list of recommendations? “The assistance to Italy, Portugal and Spain should have the same focus. Even though the institutional deficiencies in these countries aren’t as severe as in Greece, they remain a major impediment to growth.” The most serious impediment to growth in Europe is lack of demand. Those who can remedy institutional deficiencies should certainly be encouraged to get to work, but the unemployed will be waiting a long time before their efforts bear fruit. The most defective institution of the lot is the ECB. As Keynes would say, we need a better green cheese factory. @Kevin An article today from the Greek newspaper website on raids by the financial crimes squad is illustrative of the problems there… “The most persistent offenders were on Rhodes, where 11 out of 11 businesses checked were found to be breaking tax laws. Sources said that there is a SDOE team based on the island but they were not informed of the inspections, which were carried out by officers from Athens.” @colm mccarthy Especially this bit: “the lack of progress in carrying out structural reforms is causing the rescue to be associated with the government cutbacks, which are primarily hitting the poorest. That adds to the existing feeling of injustice: High-profile corruption cases involving politicians and well-connected businessmen haven’t been prosecuted, and tax evasion is still pervasive and in plain sight.” Southern European countries are very different to Northern ones. The bureaucracy in them is maddening (try setting up a business in Spaoin, or reporting a crime in Portugal) ; there is significant corruption (tax evasion, mafia etc) and a massive sense of pride/machismo/denial. These countries did borrow well beyond their means, often based on false accounting. There is enormous opportunity to make these countries more efficient…but we are nowhere close to the honest dialog needed to tackle those problems. Also, the _only_ reason effort should be made to force these countries to pull up their socks, is if it threatens global financial stability. People should not underestimate the difficulty of achieving reform in the Club Med countries. Institutional reform with improved accountability is more important than short-term spending cuts and we can see in Ireland, 4 years after the onset of the crisis, how difficult it is to achieve. There is a common thread through the slow-motion response to the banking crisis and the glacial pace of the ongoing Anglo investigations. Change if it comes at all, comes very, very slowly. There is also the pertinent fact that the foxes are the ones expected to introduce change. The Irish Times reports today: Pat Kenny…said the political class had so far failed to produce a presidential candidate to “trump” Byrne, who would get his number one vote. RTÉ must be one of the biggest entitlement clubs in the country. @ All It is not the job of the Troika to sort out the political and institutional problems of Greece. That is a problem for the Greek people (while their creditors exercise the necessary forbearance). This is equally true of Ireland. The level of debate with regard to the “race” for the post of President – which is very limited in terms of the Irish constitution – is not one likely to inspire confidence in Ireland’s case. @Kevin Demand (the type that goes beyond the internalised ‘wants’ – these are never in short supply) is a reflection of the available incomes and consumer confidence to spend it. Gross incomes are under pressure as less capital is available for investment due to deleveraging and unemployment edges up in the process of clearing the misalocated capital investments of the past. Net incomes are under pressure as governments seek more tax revenue to plug the gapping holes in their budgets, resulting from their inability to cut spending to match income. Deleveraging and clearance of misalocated investments should not be interferred with as these will (on the long run) produce healthier economies. But the government debt should be tackled more swiftly as the continuing budget deficits result either in wealth transfers from taxpayers to public sector or in further leverageing both of which are harmful for the economy. I would offer that the bailouts of indebted governments would result in complacency and lack of vigour in fixing structural budgetary imbalances. @Desmond Brennan “There is enormous opportunity to make these countries more efficient” Make them? An interesting choice of words. @Ceterisparibus I don’t doubt that there are serious problems in Greece (and everywhere else for that matter). But talking about impediments to growth without mentioning sagging demand is rather like talking about lung cancer without mentioning cigarettes. @Dom K. “Clearance of misallocated investments” is not helped by a slump in demand. Even the demolition of a ghost estate does not go ahead until some profitable alternative use is found for the site. This is likely to happen much sooner in a buoyant economy. @Kevin You missed my point. Slump in demand is one of the consequences of clearance of misalocated investments (and I wasn’t referring to ghost estates – there is an entire industry behind with capacity that has to be liquidated). It can’t be treated separately. Keynesians offer a ‘painless’ way out of the boom but in real world there isn’t one. Stimulating demand through borrowing is what got us here. The only way out is through savings and capital accumulation through sustainable production. @Dom K. Knowledge of the “real world” comes through research. Keynesians and others do more of that than you may suppose; austerians not so much. As to what got us here, there were many factors but I’d say that a poorly-regulated financial sector played the major role. It looks like the financial sector has been ‘poorly regulated’ all over the world. Nothing to do of course with Keynesian economics of government borrowing and money supply. The system is broken exactly because the govts bought into the Keynesian notion that the cycles can be made smooth by supersmart govt mandarins hitting brake and accelerator as they see fit. And I don’t doubt the Keynesians and other proponents of endless government interventions do more ‘research’ in most cases using govt funds. It is indeed surprising that government paid ‘research’ results in conclusion that more government funding and intervention is required. Ok, argument from authority fallacy aside, what exactly are you proposing here? More borrowing? I am afraid the end game is near as markets don’t trust the govts can repay what has already been borrowed. More taxes? Taxes are demand neutral. Printing money? Have you ever lived through a hyper-inflation, because I have and if you want I can share some experiences with you to illustrate how printing money stimulated demand. 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