What really caused the eurozone crisis?
bbc.co.uk
bbc.co.uk
They correctly show that government debt did not cause the current crisis but total debt did. By stating that the increase in private sector debt caused it they almost (incorrectly) imply that therefore the private sector (and the people) are to blame. Of course it's the responsibility of the government to take corrective measures to ensure long term financial stability. The European governments were completely negligent in that regard. Note also that the financial sector is not mentioned at all in this analysis.
The nasty dilemma offered at the end is a false one. First the article observes that government spending was not the cause of the crisis, and then the solution revolves around government spending? The current eurozone debates are about politics: the people in western Europe want to punish the countries they see as irresponsible. That's why we have all the talk about austerity measures. Austerity will only further cripple the economies of the GIPS countries as we've seen during the Great Depression in the 30s. Austerity doesn't work: it leads to criminal levels of capital waste: high unemployment, low standards of living, poor liquidity, and so on.
So the question isn't "Should the GIPS countries spend money to prevent a worse recession?" the real question is "How can the GIPS countries get the money to prevent a crushing depression and a lost generation?". There are a number of options: ECB bailout. Eurobonds. Bailout by the richer part of the eurozone. Various forms of quantitative easing. Unfortunately this is difficult as long as the people in Europe are angry at the GIPS countries. No politician is going to support a bailout at the expense of the richer countries if the people want to see blood.
- No discussion of "off balance" sheet government obligations, like pensions and entitlements. These don't count as "debt", as they aren't bonds, but they are long-term cash flow obligations that reduce resources available for debt service
- Likewise, no discussion of public sector compensation in excess of a position's productivity
- No discussion of economic growth rates, which expand the amount of debt a country can sustain
- No discussion of the role of low euro rates in private sector debt expansion. Markets presumed governments could and would bail out their banks, and thus didn't scrutinize bank assets for recovery values. (The graphic ignores financial sector debt, but that's debt _of_ the banks, not debt _to_ the banks.) The conflation of bank and government debt is a running theme in the euro crisis, see Sarkozy's remark that though the ECB wouldn't lend to governments it would lend to banks, and the banks would lend to governments, problem solved.
The graphic thus understates the sovereign obligations. By ignoring growth, it ignores the key variable driving differences in perceived debt sustainability. And by ignoring market preconceptions of government backstops for banks, it misses the role of the euro in those private sector debt levels.
The clue is this: why doesn't the graphic explain sovereign difficulties borrowing, evident in their rising yields? Bond buyers are saying that _governments_ won't be able to sustain their debts. That might reflect an opinion that governments will borrow unsustainably to bail out their banks. But then the solution would be to let the banks collapse and remove that possibility. But the governments can't do that because their economies are dependent on excess bank leverage for the growth they do have, and for the one source of financing they do have.
So if we agree the wicked bankers did it, we're saying that governments have been using excess bank leverage to hide the lack of fundamental growth, and extent of structural problems.
The truth is that the problem is excess leverage and spending in both public and private sectors.
P.S. It's the same story in the US, lagging by a few years and mitigated by our ability to print money.
How can these countries rely on a cooperative economic superstructure when, beneath it all, they still see each other as competitors? Transnationalism doesn't work when you're secretly a nationalist.
Whenever there is fiscal union comes the notion that there should be some control over how money is spent. Germany and Greece and Spain and Sweden and Italy and every EU country will want a say. After all, it's "their" money.
So there are going to be fundamental game theory problems unless all these different places can agree how money should be spent--and ideas about how money should be spent are a big, deeply embedded part of culture. If a fiscal union happens I would venture to guess one of the following will happen: one, eternal squabbling; or two, a partial homogenizing of European culture. I don't like either outcome. Differences are good.
No, no amount of high hopes or good feelings will save you from this. I don't understand the urge to yoke societies together in unhelpful ways any more than I get why incompatible people enter bad marriages. It's always been obvious to me that takes more than love to work together, and often people work better together if they intentionally keep their independence.
Actually, here in Poland, EU slowly (too slowly) forces us to accept our own cultural diversity.
Stop panicking. If our culture was defined by our banking system then we wouldn't have that much of a culture.
Also, I'd be surprised if this wasn't true for every sufficiently big country. I'm almost sure it's true for China, and that's even though their government isn't exactly the most supportive of cultural differentiation.
Edit: to downvoters: Sweden is part of the EU and so far has been avoiding monetary union through a loophole.
Aren't a more homogenous culture and some amount of quibbling a small price to pay for a Europe where war between nations is inconceivable? I mean isn't that the far scarier outcome that was one of the motivating factors behind creation of the Eurozone/EU?
For example, in this case Spain did everything right. They even regulated their banks so they wouldn't make risky loans. But they couldn't stop German banks making the same loans - so does this mean that regulatory authority over banking should be seceded to the EU too?
The were some talking about burst the bubble in 2004, but Zapatero's government never implement the reforms. The Spanish prime minister regret later about not bursting the bubble earlier.[2]
Spanish banks are well protected against loans because, the asset pledge as collateral" clause is rarely use in Spain.
[1] http://www.businessweek.com/news/2011-12-08/sabadell-buys-ca... [2] http://www.elmundo.es/elmundo/2011/06/28/suvivienda/13092749... (Spanish)
The USA made the conscious decision to be a unified, federalist nation. The EU is "trying to have its cake and eat it, too" in that it won't go that far. It wants the benefits of federalism with the benefits of independent national sovereignty. What it gets, instead, is neither one nor the other.
Clearly another option is central bank bail out. I can accept that some people don't like that option, but it almost seems manipulative by the media to consistently not mention it and call it for what it is. Quantitative Easing = Printing Money. Have a public discussion of its merits.
If a problem seems hard, its because you don't have enough information or aren't seeing all possible solutions. (someone famous must have said this).
Unfortunately, you are incorrect. There are problems that are impossible to solve, simply because there exist mutually incompatible definitions of "solve" among interested parties.
""Wicked problem" is a phrase originally used in social planning to describe a problem that is difficult or impossible to solve because of incomplete, contradictory, and changing requirements that are often difficult to recognize. Moreover, because of complex interdependencies, the effort to solve one aspect of a wicked problem may reveal or create other problems."
How does the halting problem, or even NP complete, factor into this "theory"?
You also seem to be assuming that there's always a "good" solution. That's clearly not true.
No, austerity + nominal wage stickiness is claimed to do this. Since austerity seems more or less a given, why not try to increase wage flexibility?
I think that "Greeks/Italians need a cut in their real wages" would be a very easy sell to Germany right now.
Austerity may be a given politically, but economically speaking it doesn't make much sense, and it's definitely not in the best interest of the EU (or the world) as a whole.
[1] Not definitely, as some people pointed out below.
Since austerity seems unavoidable, why aren't you and other people who buy into Keynesian theory pushing for wage flexibility?
So why tinker with that ball of wax and hope for the best when you can just set a moderate inflation target and achieve the same end result?
Everyone knows what moderate inflation does. It's well studied and understood. People who work or put their money to work have little to fear from it (as rates of return reflect and include expected inflation). Naturally, you don't want high inflation or runaway inflation, but it's clearly possible to hit and maintain something like a 4% inflation target.
In that case [1], Keynesian economics is wrong and we must discard it's conclusions.
Absent Keynesian economics, we have no reason to believe austerity will cause "criminal levels of capital waste" (to borrow gizmo's language). So therefore, there are no drawbacks and we should pursue austerity. Right?
[1] I don't actually believe this, I'm going along with it for the sake of argument. My actual view: the US did not cut the wages of government workers during the recession, nor did it reduce real wages (on the employer side) by cutting benefits (e.g., SS contributions, subsidies for health insurance, etc). In fact, during the current recession, the US increased wage stickiness by raising the minimum wage.
2. There is no economic theory that has ever stood entirely on its original principles and made good predictions of how the economy works. Modifying and refining cases in response to real data is how all science progresses -- if I may be so bold as to suggest that economics could stand to borrow more habits from real science than the philosophy and morality that seems to have driven it for the last few decades.
To your actual view: I'm not sure how much a small bump in the minimum wage increases wage stickiness over the economy. Very few workers actually earn the minimum wage, and the difference between the minimum wage and average wage is still quite large.
Huh? Wages lie along a continuum of flexible to sticky (typically expressed as a time, i.e. "how long before wages adjust"). You claimed US wages lived on the flexible end of the continuum, yet the US still has recessions. Keynesian economics claims this cannot occur.
If you want to borrow a habit from real science, borrow the habit of rejecting theories when they disagree with reality. If you believe US wages are flexible, and the US still has recessions, then the US provides a direct counterexample to Keynesian economics.
As to my actual views, I believe our recently ended recession is primarily structural. If it were Keynesian, the increases in government worker pay would have more of an effect than minimum wage hikes. I'm just pointing out that the US has not pursued any flexible wage policies that I'm aware of, and has actively reduced wage flexibility.
But, in the meantime, Keynesian economics have made very useful predictions elsewhere and with a notably better record than competing theories. So all I'm saying is: let's not throw out the baby with the bathwater. Keynesianism didn't have much useful to say about economics at a zero lower bound, but further study and modification has resulted in theories with remarkably good records in making useful predictions in our current situation (even if no-one seems to listen to those predictions).
What you seem to be suggesting, is akin to saying we can/should throw out the standard model entirely in favor of universal application of quantum theory, simply because the standard model breaks down at quantum scale. Whereas I'm advocating that we can use quantum theory where it makes sense and the standard model where it makes sense, until a grand unified theory arrives and is tested.
> "I believe our recently ended recession is primarily structural" My gut feeling is also that this is true, though I can't say I've seen convincing evidence to support it. And I get rather nervous when my gut feelings aren't supported by evidence, particularly when that evidence should be obvious and overwhelming.
And I completely agree that the US has not pursued flexible wage policies and raising the minimum is a move away from flexibility. I was just noting that the move was a minor one, and as such, we really shouldn't expect that it would have had much impact.
Are they?
A lot of people who lost jobs and found new ones are making less than they were before. The "salary" for those jobs may not have changed, but worker income sure did.
First of all, once you strip away all the protections for workers at all levels of government to deal with this one event you will never be able to put them back again. (Hard-core libertarians might view this as a great victory but they are very much in the minority.)
Then, you need to let all sorts of long-term contracts be broken, (legally somehow) between suppliers up and down the supply chain of all sorts of complex industries to allow for the "gains" from the wage drops to be enjoyed by the whole system instead of just going into the pockets of the capital-owners who slash their work-force pay and hire nobody.
And so on... so you end up radically changing on what will be a permanent basis a modern economy the functioned reasonably well for quite a while to fix a temporary problem. (Probably destroying the economy really, all the legal wage protections being removed would be very, very bad.)
History clearly shows that government worker's unions have no political power and never get what they want. Similarly, the RIAA/MPAA - politicians are to busy worrying about innovation and consumers to protect the starving record company execs.
...instead of just going into the pockets of the capital-owners who slash their work-force pay and hire nobody.
According to Keynesian theory, the only reason those capital-owners don't hire workers is because real wages are too high. If wages were lower, the capital-owners would hire workers to increase their own profits.
If you don't believe in Keynesian economics, that's fine. I also believe it to be useful only in limited circumstances. In that case, gizmo is wrong, and austerity will not be bad for the economy.
But my question is why Keynesians aren't pushing for wage flexibility.
And so on... so you end up radically changing on what will be a permanent basis a modern economy the functioned reasonably well for quite a while to fix a temporary problem.
According to Keynesians, what you call the "permanent basis [of] a modern economy" is the cause of every single recession.
According to them, absent wage stickiness, large nominal shocks to the economy would be rapidly corrected for, resulting in only real wage adjustments. This is exactly the same effect they attempt to engineer with monetary and fiscal stimulus.
What I called a "modern economy [that] functioned reasonably well for quite a while" is of course the cause of every recession -- I did not call it perfect. If you are going to rip it up to remove wage stickiness you better be pretty confident of all of the unintended consequences that are going to come along with that are going to be better than what we had going into this thing.
I think if one wants to argue that wage stickiness is a good lever to use in this situation then there needs to be an actual, practical path to achieving that that they present that can be acted upon. I offered the only way that I think is a path there but I do not think it is either good or practical. The other way is ordinary deflation over time, but I think that is just too slow (and painful). Do you have another way that would work and quickly that I am not seeing? I am genuinely interested.
Monetary and fiscal stimulus is quite well understood, it has been used many times.
Your first comment about unions is obviously meant to be sarcastic but in the current political environment the fact is that unions (public and private) do not have the power they once had. If worker protections were miraculously repealed there would be a lobbying battle to get them back but no assurance that the unions could win. But if you accept my premise that this is the path and believe the unions are too powerful then wage stickiness is a moot point - as a non-starter why bother discussing it, Keynesian or not?
There is demand. I'm willing to pay someone $10/hour to clean my house. My startup would love to employ fashionable girls for mechanical turk work at wages far below the US minimum wage (we employ several of them in India). So how come unemployment exists at all?
Keynesian economics postulates wage stickiness as an explanation for this unemployment.
That is why I say that you need to be able to break contracts too - then whole economy would need to be able to realign in a very short period of time to match the effects the spending can have in the same period of time.
This is not Keynesian economics. This is a structural theory of recessions - things have changed, and the economy needs time to re-adjust. I.e., a former construction worker in CA needs time and training to find a new job, the business owner needs to renegotiate contracts or go bankrupt, etc.
Note that in structural theories, monetary or fiscal stimulus has no clear effect, and government spending/austerity measures should focus on getting fundamentals right (i.e., eliminate wasteful spending) and speeding up adjustment (promoting job mobility).
Do you have another way that would work and quickly that I am not seeing?
The easiest would be cutting the pay of government workers, cuts to payroll taxes (particularly the employer side), and reducing unemployment benefits and welfare.
Another method would deal with unions. If any union refuses an immediate cut in total comp, the employer gains the right to fire union workers and permanently replace them with non-union workers.
But if you accept my premise that this is the path and believe the unions are too powerful then wage stickiness is a moot point - as a non-starter why bother discussing it, Keynesian or not?
Intellectual curiosity, mostly. So far, I've only seen a single Keynesian (Karl Smith) actively promote wage flexibility, in spite of the fact that it's a logical conclusion of the theory.
It's also relevant to this discussion - Greece has absolutely no ability to prevent austerity (they run at a budget deficit, even ignoring interest/debt service), but they do have the ability to promote wage flexibility within their own borders.
I suspect the Keynesian model would probably perform pretty well if the suggestions you make were undertaken.
The demand that suddenly disappears when such a large section of the population has their wages cut drastically plus the fear that it could be cut again at any time with no notice would seem to me to do a lot to offset the demand created by being able to employ a Spanish employee at $1/hour. I'm not a big believer in libertarian ideas so I think that it would probably be a disaster for society as a whole, but that is a debate for another place and time.
That's not true - Keynesian theory says capital owners don't hire when demand for goods is insufficient.
I honestly have no idea how things will be fixed (hint: they will not be fixed) but certainly lower wages and higher unemployment are not an option unless you want the population to literally starve. Young people in Italy have been living off their parents for more than a decade now, if it weren't for them the vast majority of the population under 30 in Italy would be really really poor by now.
http://econlog.econlib.org/archives/2005/03/let_them_get_ro....
If wages were flexible, Italy would not have 35% youth unemployment. It would have 5% unemployment at considerably lower wages.
Italy has a GDP per capita of $30k/year (PPP adjusted). That's very far from starvation. Even if wages drop to $10k/year, no one will "literally starve."
If Italy does have unemployment with flexible wages, then Keynesian economics must be wrong. In that case, you must agree that gizmo was wrong when he claimed "austerity...leads to...high unemployment...[etc]".
Take it up with gizmo, not me - I'm not a Keynesian. I'm just asking why Keynesians don't follow their theories to their logical conclusions.
He also argued that to boost employment, real wages had to go down: Nominal wages would have to fall more than prices. However, doing so would reduce consumer demand, so that the aggregate demand for goods would drop. This would in turn reduce business sales revenues and expected profits. Investment in new plants and equipment—perhaps already discouraged by previous excesses—would then become more risky, less likely. Instead of raising business expectations, wage cuts could make matters much worse.
Further, if wages and prices were falling, people would start to expect them to fall. This could make the economy spiral downward as those who had money would simply wait as falling prices made it more valuable—rather than spending. As Irving Fisher argued in 1933, in his Debt-Deflation Theory of Great Depressions, deflation (falling prices) can make a depression deeper as falling prices and wages made pre-existing nominal debts more valuable in real terms. [1]
To summarise, Keynesians generally believe that decreasing wages deceases aggregate demand, which discourages growth.
The general Keynesian to high unemployment during a recession is to increase government stimulus to increase aggregate demand. That approach is problematic in Europe at the moment, as the infographic illustrates.
[1] http://en.wikipedia.org/wiki/Keynesian_economics#Wages_and_s...
How does that differ from what I said?
Note that I wasn't advocating a deflationary spiral, I was advocating a stimulative wage cut while allowing price levels to rise.
See also: http://en.wikipedia.org/wiki/New_Keynesian_economics
Note the "wage cuts could make matters much worse".
I'm unclear if you think that a "stimulative wage cut" (!!) is Keynesian or not. To be clear: it is not - under no circumstances would a Keynesian think a wage cut is stimulative.
Further, the decrease in real wages caused by stimulus (whether via a nominal cut or inflation) causes AD to increase (and GDP as well), since it puts people back to work. At least, that's what the math says.
I do realize that political pundits posing as economists (including those with Nobel prizes) often ignore the math when they don't like where it leads...
I assume we both know economics isn't like that - it is about statistics, demand curves and velocity of changes across the economy. Sure, an increase in employment increases aggregate demand. But a decrease in wages also decreases aggregate demand.
As far as I know, most economists would argue that if nominal wages weren't sticky, unemployment would be less of a problem. When you say "Italy should have no unemployment", I'm not sure who you are arguing with, but I don't think it is Keynesians.
It's also funny how people talk about the lazy people from the South. I actually work in London and people work much less hours there than in Portugal.
Germany not having had a real estate bubble, for many reasons (population contraction being one) is likely to be a better explanation than German virtue to their debt level being so much better.
The US at least, didn't do austerity during the GD or even the run-up to the GD. No, Hoover didn't do austerity. He increased govt spending significantly and Roosevelt actually campaigned against that.
The US did try to decrease production, believing that "excess supply" was the problem. Both Hoover (a "progressive Republican") and Roosevelt agreed on that. Roosevelt didn't change that policy until he figured out that an "arsenal of democracy" had to actually produce lots of stuff.
And that's pretty much when the Great Depression ended.
> Austerity doesn't work: it leads to criminal levels of capital waste: high unemployment, low standards of living, poor liquidity, and so on.
Surely you're not arguing that modern govts make efficient capital spending decisions. In the US, govt spending goes to cronies.
> Surely you're not arguing that modern govts make efficient capital spending decisions. In the US, govt spending goes to cronies.
I'm not arguing that the government is a paradigm of efficiency but cronyism is a huge problem in the public sector as well. So government programs can certainly be less inefficient than the private sector. Recessions and depressions destroy value, destroy capital. If interference by the government can reduce or prevent this, I'm all for it.
It's not nearly as large a factor, and they're spending their own money, so there's a natural limit.
> If interference by the government can reduce or prevent this, I'm all for it.
The question is not "can reduce" because it's easy to argue that the "correct" govt action could help. The relevant question is whether the govt actions that are likely to happen will be helpful or harmful.
Do you believe that govt actions in the recent past have helped more than they've hurt? If not, why do you think that the next actions will do better?
The US government didn't cause the great depression, but they didn't prevent it either. Ultimately, as the US government started preparing for war spending increased massively and the economy recovered as a result, as Keynesian economics would predict. But even in the late 30s there were periods where the US government tried to balance the budget (and cut spending) and unemployment rose and and the economy got worse as a result.
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonge...
In which case a deeper recession and some polices that caused more borrowers to default would actually help Spain recover at the cost of it's banking sector. The short term alternative is to prop up it's private sector for a few years in the hope that the world economy improves and they avoid a deep recession at the cost of a crushing public debt load.
http://www.npr.org/blogs/money/2011/03/01/134168778/the-tues...
But it's important to recognize the assumptions that go into Keynesian analysis, sticky nominal wages in particular. Sticky nominal wages prevent the necessary cuts in real aggregate wages, leading to unemployment (another way of cutting real aggregate wages). Keynesian analysis typically treats sticky nominal wages as given.
But is it? In the time of Keynes, government employment was a fairly small sector of the economy. This is no longer true - I've heard estimates that the public sector makes up 20-40% of Greece's economy. Further, even in the private sector (particularly in Europe), a lot of wage stickiness is caused by union contracts, minimum wages, and mandated benefits. Wage stickiness is also created by welfare/unemployment/etc - why get a job paying less than your old job if it only pays marginally more than unemployment?
So why not make use of this and impose wage flexibility by fiat? Cut the pay of government workers, force renegotiation of union contracts, reduce benefits and make welfare/unemployment/etc as unpleasant as possible?
I truly don't understand why Keynesians don't push for these policies.
(Note: I'm aware of the problem of nominal debts, these could be mitigated by making it easier to settle debts. I.e., make foreclosure/debt collection faster and easier.)
[edit: just curious, will those who are downmodding explain where my analysis fails?]
It would also be good to note that the US is pretty much just as insolvent as Europe. Individual states are going bankrupt, but no one seems to care, at least as long as there's something else to talk about.
The real problem is too much greed & corruption. That sounds simplistic and vague, but that's what it all boils down to.
Unemployment Insurance is insurance setup to help you transition to a job at similar wage, that is it's purpose. Some tiers in the US are subsided but do have stricter job acceptance & search requirements already in place.
Cut welfare for the disabled, elderly & impoverished? Talk about winning the hearts & minds!
I think you'll also find it hard to get prosperously employed workers to take a pay cut, especially a massive one meant to rebalance the entire economy. If you do start to see it happening you'll probably have imbalances where companies keep prices high to milk profit while worker compensation goes down. You may also see certain sectors impacted more than others, causing an exodus of talent in certain areas. This might just further destabilize the economy.
Also as far debts go, if people don't have the money to pay, they don't have the money to pay. If the banks foreclose on property but people don't eventually buy that property, that's not very helpful. Also banks have already been foreclosing on properties too quickly & got in trouble for it.
The goal is not to impose a pay cut on currently employed workers, the goal is to convince currently unemployed workers to take a job at a lower wage. Since unemployment benefits provide a disincentive for finding work, reducing unemployment would reduce this disincentive.
If you do start to see it happening you'll probably have imbalances where companies keep prices high to milk profit while worker compensation goes down.
This is exactly what Keynesian stimulus is designed to accomplish: a reduction in real wages. I'm glad you agree that if wage flexibility could be engineered, then this would make Keynesian stimulus unnecessary.
If the banks foreclose on property but people don't eventually buy that property, that's not very helpful. Also banks have already been foreclosing on properties too quickly & got in trouble for it.
Homeowners and home-mortgagers seem to be the driving force in sticky house prices, not banks. Banks tend to sell foreclosed properties at, well, foreclosure sale prices.
As for foreclosing too quickly, that's why I would (assuming I believed in Keynesian economics) advocate changing the law to make foreclosure faster and easier.
Sounds like blaming the unemployed for being unemployed. There are many factors regarding people who are unemployed long term. Most often it has nothing to do with the minimum wage, people being lazy or feeling entitled.
>I'm glad you agree that if wage flexibility could be engineered, then this would make Keynesian stimulus unnecessary.
Sounds like it's inviting companies to continue to profit while not hiring or rehiring their workforce a lower wage. That or you get disparity between old workers & new workers. Cost of living I doubt would adjust very quickly. Those who would pay the biggest price are those coming back into the workforce who will be making less, but probably paying the same living expenses.
>Banks tend to sell foreclosed properties at, well, foreclosure sale prices.
You assume they are selling. The housing market is flooded with foreclosed properties going nowhere. If the idea here is to reducing wages for those who are able to find a job.
Sounds like accepting reality. Moral hazard is real, and this has been empirically demonstrated whenever a natural experiment presents itself.
https://docs.google.com/viewer?a=v&q=cache:xdATBYGtHBcJ:...
(Note: I only read the first paper in detail, but the second is quite popular.)
Sounds like it's inviting companies to continue to profit while not hiring or rehiring their workforce a lower wage...making less, but probably paying the same living expenses.
A monetary or fiscal stimulus does the same thing - the only difference is that instead of making 10% less dollars, workers earn the same number of dollars but prices go up 10%.
The housing market is flooded with foreclosed properties going nowhere.
This is because regulations allow banks to mark properties to a model, rather than to market. This is also why banks are not foreclosing on a lot of deadbeats - they don't have to admit to shareholders that they took a loss until after they foreclose.
This is basically just a way for banks to cook the books, but for some reason politicians and regulators don't seem to care. Strange.
80% of those receiving "emergency" unemployment benefits in Uruguay rejected a job offer
http://www.elobservador.com.uy/noticia/214462/el-80-de-la-po...
It would at least be polite for people to say why they don't like your opinion, rather than just bitch-slapping you into silence.
But the interest rates are being set by the lenders, and this can be used as a kind of weapon to retaliate in this game.
What's happeneing at the moment is that the bond holders are basically trying to force the governments to raise taxes and cut public expenditure for no other reason than so they can get their money back.
Governments are caught in this trap because it's rather unfair to punish the people like this.
If you take a step back and look at the series of problems since 2007 you'll see that the banks were responsible for selling worthless "structured debt" to each other before realising they couldn't trust each other, then freezing all lending causing liquidity problems, and now using bonds interest rate weapons to effectively prevent governments from legislating against their bad behaviour.
It's a game of poker with some very high stakes: the options are a few banks choking or whole countries.
I'm not greek but the more I read and look at this the more I think they had the right idea to stand up to the banks. In the end they got half their debt removed, but unless all politicians stand together with the people and call it, this will all end in tears.
Also if the countries default the banks do too, as they hold a lot of the government debt - it was a mutual game.
But things have changed since then... firstly governments have guaranteed people's assets in the event that a bank fails. In addition some countries took charge of their banks, notably the UK, meaning that at least from a "business as usual" case, it is not inconceivable nor technically impossible to move the accounts from a failing bank into a nationalised bank.
So if the banks were to default now, the situation would be different. The governments could let a bank or many banks fail and with careful management take back control.
One other point is that banks can make very large profits in a very short space of time. LloydsTSB in under six months following the write-down of massive losses in the crisis, made a first quarter profit of 3 billion pounds. I don't know many companies that can turn things around that quickly, but banks regularly do.
This, to my mind, makes it less credible to hold the threat of many banks defaulting over the heads of the governments, and is another reason why I say the governments make the call.
Before the Euro introduction, borrowing costs in Germany, both for the private as well as the government sector, were cheap, whereas in the southern countries they were high.
With the Euro introduction, borrowing costs were essentially unified, the interest rate being set by the ECB. So Germany suddenly faced higher borrowing costs than before and the southern states faced significantly lower borrowing costs.
That lead to the debt explosion in southern Europe and it put Germany in a tougher position than before. Germany went through an economic slump between 2000 and 2005 and had to retool its economy to be as competitive as before. Germany did this with internal devaluation: German wages have now been stagnating for a decade.
Between 2005 and 2010, the roles have switched and right now Germany's economy is almost overheating, in part because the interest rate set by the ECB is super low to make life easier for the struggling southern countries.
That's why Euro critics like Ambrose Evans-Pritchard call the ECB's policy "one size fits none". However, that's not to say the Euro critics are right. The hope of Euro optimists is that the Eurozone countries' economies will eventually converge. Whether or not that will ever happen is still up in the air. The whole thing is an experiment without precedent.
A (relatively tiny) number of reputable economists are starting to look beyond these current-account imbalances to the disproproportionate growth and destabilizing role of the financial system -- a welcome development IMO.
Here's a recent example (in lay language): http://www.voxeu.org/index.php?q=node/7446
Can anyone corroborate this data? Is this actually true? That would be such an easy explanation…
I am not an economist or a political theorist, but I think that the Eurozone crisis proves that in trying to create the EU and gain some of the economic advantages that the United States has with a single currency (and other advantages as well, I know I am simplifying), the Eurozone founders didn't fully take into account the cultural issues that their creation would face. America, for various and sundry reasons easily traceable through its founding, is largely culturally monolithic (I realize this is a simplification, yes) and by and large, Americans in one geographic region of the country (for example, the Midwest, which didn't fly too high in the recent booms but is also not facing a bottom dropping out like other regions) do not strenuously question the need to 'bail out' other areas of the country through large federal spending. It happens in America, its just largely invisible and rarely widely debated along geographic lines (farm subsidies, bank bailouts, automaker bailouts, all can be argued to have a strong geographic context that largely gets ignored in America politics) because of the strong nationalistic component in America that the Eurozone lacks.
Smaller versions of this basic problem can be seen, manifested in different ways, all throughout Asia (Afghanistan, India, India/Pakistan, Laos, China) and Africa (Sudan/South Sudan, the DRC), and probably though South America too, but I am far less familiar with SA.
The "Don't cut spending" solution at the end mentions the real heart of the problem, "The ECB says its mandate does not allow it [to bail governments out]." -- All the Eurpoeans need to do is make the ECB a lender of last resort. In a liquidity trap expanding the monetary base will do very little to devalue the precious savings the Germans are so worried about, so it won't even hurt them.
The problem with this solution is that it is specifically prohibited by the EU treaties (Maastricht, I believe). I would guess that this treaty change (which would require a referendum in Ireland) would be extremely unpopular in Germany and the Netherlands, the main payers in this situation.
That being said, Eurobonds are not specifically forbidden so I suspect that the Germans will relent on this after they've extracted their pound of flesh.
Italy and Greece did borrow at US-like rates for the last ten years. They can't pay back those debts, and saying that if rates were low they could afford to increase the debts even more is not that helpful. People have realized that there needs to be a plan that involves reducing debt levels, as the ever increasing bank leverage story that funded both the government and private sector debts is over now, so there are no buyers of new debt, at any interest rate.
If you have bought the idea of "expansionary austerity" then I don't know what to say - it ain't gonna work and it hasn't worked for anyone so far. The problem right now is exactly that "people have realized that there needs to be a plan that involves reducing debt levels" - "people" want to do that now but now is not the time to do it, it is causing wasteful under-utilization of capital and causing GDPs to run way under their potential rates of growth.
The assertion that "there are no buyers of new debt, at any interest rate" is incorrect -- Spain, of all countries, sold more debt than it expected to on the open market 3 days ago.
My original comment was that Krugman was right about this crisis from day-one and about the US crisis before that. I am really just repeating things he has already said many times in many places that no one anywhere seems to be able to refute with real data.
Spain's problem never was the government, it was private sector housing, funded from abroad. The solution to that is structural, and also involves getting the private sector debts written off, which also means the banks are bust. Bailing these out will add another huge hole on the governments balance sheet, and make it even harder to fund debt.
Maybe the thinking is that stuff exported by Spain and Italy is on average crappier than stuff exported by Germany, so it should cost less to manufacture, ie. lower wages?
It is really a matter of what you invest on and export: and with few exceptions, the choices made here were not brilliant...
Btw. there's a Google feature for this:
I just submitted it to HN http://news.ycombinator.com/item?id=3381634 and I'd be interested in hearing the opinion and criticism of people with better knowledge of the monetary system than me.
Greece 22% of the people in Greece work for the government. That's unsustainable. They paid very little taxes and the government's debt ballooned to a point where the market said enough. Greece asked the EU for a bailout & they got it. There were no real austerity measures. Now they want the debt holders to cut the debt in half.
Belgium's problems. Belgium's debt is ballooning out of proportion & bigger than Greece's. Close to 10% of the people work for the government. Savings are high and can be used to revive the economy. Instead, the government asked everyone to buy up their bonds at prices lower than what's available on the market. Crazy & stupid but real. 50% of all goods are export, even though labour costs are twice as high as Spain's. The Netherlands is in a similar situation. How is that possible? They just work harder. I don't know why that isn't mentioned in the article as a possible solution.
The Netherlands They were able to handle the world economic slowdown that started in 08. They came prepared, they paid down their debt with every surplus they had. Exports have been holding up quite well, although the slowdown is catching up. Savings are high and that's another bullet you can use to revive the economy. Housing prices are a bit high though. Also, those who work after age 62 can earn a bonus for every year they remain employed.
ECB & IMF The ECB says they aren't allowed to buy government debt. That's correct but it's BS as well. They found a way around it. They gave money to the IMF and the IMF gave it to Italy. With Germany & France's permission. Last week the IMF tried to raise money from its members. They failed at it. Both the IMF & the ECB are sitting on gold reserves. Not enough to bail everyone out but perhaps enough for some quantitative easing. Not that I'm in favor of it. Quite the contrary.
Inflation When everyone wants a bailout and the ECB blows through all reserves, then they will have no other option than to do what Ben Bernanke is secretly doing in the US. He's buying up all the debt and he's probably doing it by printing more dollars.
Don't worry, don't feel sorry, there're other solutions.
1) Governments need to be smaller & more efficient.
2) Lack of discipline & brass balls In some EU countries you get paid $ 1,000 per month to take time off. You get to ride on the bus for free. You don't have to pay taxes on your house. The list goes on and on. It's a luxury problem. It's easy to stop. It's political suicide but it has to stop.
3) Retirement age. The worldwide average is 64 if I'm not mistaken. In Europe it's something like 60 - 62. In Germany it's 65 to 67, so they already shot that bullet. It used to be 50 something in Greece ...
I'm all for austerity programs because I want the craziness to stop. I want our politicians to stop getting deeper in debt. Now !
Everything that happened was inevitable.