Courtesy of VoxEU, here.
Here are three papers I have read recently.
1. Reinhart and Trebesch on the way that external debts can hollow out local democracies. No need to elaborate on this I think.
2. Avdjiev, McCauley and Shin on cross-border banking: well worth a read for people not familiar with this stuff. They are talking about complicated transactions, but as we know in Ireland, much simpler transactions (banks borrowing overseas) can have dangerous consequences.
3. Athanasios Orphanides on the highly politicised nature of crisis decision-making in the Eurozone.
From 3, and from everything that we have observed during this crisis, from Ireland in 2010 to Greece in 2015, I infer that a small country is much more vulnerable inside the Eurozone than outside, if it gets into trouble. Outside, you will deal with the IMF on its own, and they have a standard policy template: debts will be written down, currencies will be devalued, and yes, there will also be austerity. Inside the Eurozone creditor countries will sit alongside the IMF at the table and you may find that neither of the first two policies will be feasible, which will make the austerity far more harmful than it would otherwise be, both economically and politically.
From 2, I infer that a small country needs to watch its banks like a hawk, especially if it is inside the Eurozone, because (from 1, and 3, and from what we have experienced since 2010) the political consequences of not doing so are just too damaging.
And from 1 and 3, I infer that government debts are something that small countries inside the Eurozone also need to be very concerned about. Especially in a monetary union without a banking union, like ours.*
So I find myself in agreement with Colm McCarthy. As was the case 15 years ago, we need to worry about the possible real exchange rate consequences of expansionary fiscal policy at this point in the cycle. And to be fair to the Irish economics profession, lots of people did worry about that then. But the main concern for me is no longer about economics, but about the risks to our Republic’s democracy. The price of freedom is eternal vigilance.
*What is a banking union? If Arizona elects a bunch of communists or survivalists to run the state, and the state budget explodes as a result, local banks will still be backed up by the Fed. My money will still be safe. I will still be able to withdraw it if I choose. This is what a banking union looks like, and don’t let anyone in Brussels or Frankfurt tell you any different.
Papers are available here.
Philippe Legrain points out that, far from creating the sort of European-level democratic space that would allow citizens to choose between political and economic alternatives, closer European political union is likely to place more even restraints on the power of politicians to respond to voters’ demands for alternative policies. This is because ever more rules proscribing what others can do, and made up by Germany, is what Germany wants (not that she has historically felt bound by rules when fundamental national interests are at stake, as inter alia the collapse of the EMS and the scrapping of the excessive deficit procedure inform us; and quite right too in my view).
But why does Germany want this?
Harold James has one view here.
And here is J.A. Hobson:
Moreover, while the manufacturer and trader are well content to trade with foreign nations, the tendency for investors to work towards the political annexation of countries which contain their more speculative investments is very powerful.
Policies undertaken from a narrow national perspective that encourage systematic fiscal surpluses coupled with a national consensus on wage suppression between unions and industry facilitated by the state, impact negatively upon domestic spending while increasing national saving and may lead to mercantilist outcomes of systematic policy-induced positive trade balances with large financial flows going the other way. This mechanism in relation to export-dependent countries like Germany has been recognized for a while by leading American economists like Obstfeld (the IMF’s new chief economist succeeding Blanchard) or Bernanke, while many have also pointed out low domestic investment, consumption taxes, and rigidities in the service sector as additional policy-related reasons for this German systematic phenomenon. Continue reading “Guest post by Marios Zachariadis: On the Greek Crisis and German Imbalances”
1. “We averted the plan of a financial choking and banking system collapse.” (Tspiras)
You are the prime minister Mr Tspiras. Did you not have a plan B to deal with ECB blackmail? If not, why not? Did you really think that the others would back down because of the possibility of Grexit, when it was so clear that you would be willing to do almost anything to avoid it?
2. The new (and conveniently self-interested) German doctrine that defaults are impossible within the Eurozone. Remember the no bailout clause? Ashoka Mody is surely right: these negotiations will kill the entire European project sooner or later. Better to let countries default when that is what is required.
3. Nice to hear Merkel saying that Greece may win back her trust. If I were Greek I might not trust European promises regarding debt rescheduling. Have we not heard those before?
4. How high is Greece’s debt to GDP ratio going to be now? Over 200%? Even if there is some reprofiling, does anyone think this makes sense?
All in all a great day for Golden Dawn. As for the rest of us: I don’t suppose that any other left wing party that may come to power in the future seeking to challenge the current European economic policy mix will be as feckless as the Tspiras government. The lesson that they will draw from this debacle is: negotiating with Germany is a waste of time; be willing to act unilaterally, be willing to default unilaterally, have a plan for achieving primary surplus if you haven’t already achieved it, have a hard default and euro exit (now possible, thanks to the Germans) option in your back pocket, and be willing to use it at the first sign of hassle from the ECB. A deal could have been done today that would have strengthened the Eurozone, but instead it has just become a lot more fragile.
Update: Wolfgang Münchau is well worth reading, here.
Update: this is also well worth a read.
Update: Charles Wyplosz is well worth reading here. Good to see someone pointing out the obvious about this extraordinary programme, and also taking on the (to my mind bizarre) argument that the headline debt/GDP ratio is irrelevant.
Update: Dae Woong Kang and Ashoka Mody offer a historical perspective here.
1. I see that Juncker is saying that it is a shame that the Greeks walked out of the negotiations last week; and yet the creditor negotiating stance seems to have been “give us everything we want, and maybe we will discuss what you want (debt relief) at some later date”. For an account of the negotiations, see here.
2. I see that Hugo Dixon was describing the parties that got Greece into this mess over the course of several decades as “pro-European”, implying that Syriza is anti-European. Come again? Since when does opposing a particular policy mix (in this case one that has failed disastrously over the course of several years) make you anti-European?
3. I see that Martin Schulz is now denying having said that a no vote meant that Greece would have to leave the euro.
4. I can’t count the number of times I have heard French friends tell me that the problem is that the Greeks don’t pay taxes. (All Greeks, you understand.) What about Troika officials?
5. Aside altogether from the immense catastrophe of the last several years, Greece’s GDP shrank 0.4% in the last quarter of 2014, before Syriza got to power. Just saying.
What I found most galling was the argument that Grexit would bring about an economic catastrophe, as though the catastrophe had not already happened.
Some of the crocodile tears being shed on Sunday night about the humanitarian catastrophe that the Greeks were now supposedly bringing down on themselves (as if the ECB’s refusal to ensure financial stability in that country is irrelevant) I found pretty hard to take. Where have these humanitarians been hiding for the last seven years?
7. No comment necessary:
SPIEGEL ONLINE: Herr Fuest, angenommen, Sie wären wahlberechtigt, wie würden Sie am Sonntag beim griechischen Referendum über die Reformpolitik abstimmen?
Fuest: Mit Ja. Nachdem Ministerpräsident Tsipras sein politisches Schicksal an den Ausgang der Wahl gebunden hat, wäre mein primäres Ziel, ihn und seine Regierung loszuwerden.
8. Faymann: “Europe is known for compromises. Renegotiation until the last minute. Greece didn’t do this when it walked out of negotation.” The Greeks have been making compromises for months; where is the German compromise on debt relief?
There, that feels better.
On the bright side, it seems that around 80% of young Greek voters voted no.