Book of the Month

Hollande's dilemma: Austerity vs. Insolvency

The wave of anti-austerity swept Hollande into power in France, and for good reason - Merkel's austerity program, while sounding nice and grownup, doesn't work.

Nor has Greek tax evasion and profligacy - relying on economic statism.

With half the country avoiding taxes, 30% of income and 1/4 of GDP off the books, and about 60 billion € owed to the leisurely tax authorities, the responsibility spreads far and wide.

One touted effort at accountability showed 17,000 swimming pools around Athens with only a few hundred declared. But when a businessman confronted with a 600K € tax debt gets away with paying 11,000 €? Good luck to all that.

Even on the international scale, Greece carried 2 sets of books, the public one with 2% lopped off of debts thanks to some tricky Goldman Sachs moves - moves that cost the Greeks dearly in the long run. Though allowing her to get more loans from EU sources at better rates, plunging her further into debt.

Even if you don't think the original Goldman Sachs deal was as fraudulent as proclaimed, its followup was scandalous, with Goldman Sachs gaining both usurious rates plus betting against its own client in the currency markets.

Greece's economy is built on thin pillars - over 50% of GDP is from shipping and tourism, with a massive chunk going to government fraud and an unproductive state monopoly sector with its mandated pensions.

Greece couldn't really afford the €10 billion cost of the Olympics, including the post-9/11 security costs as well as building 21 unused facilities to maintain after.

The sensible thing of course would have been to deny Greece entry into the EU to begin with, and certainly not the Eurozone.

It's tempting to equate Greek voter outrage (I almost typed "taxpayer") with complaints of cheated mortgage holders in the US. But aside from a few individuals betting too much on housing growth 4evuh and inflation-indexed mortgage rates, the typical US homeowner was reasonably responsible and thrifty.

Most people were harmed not so much by the popping housing bubble, but by the financial crash that took jobs and killed income & ability to pay - exposing people to the whims of health crises and unscrupulous mortgage houses (grabbing individuals' property while knowing the average Joe can't respond as quick and powerfully as a major bank even if in the right).

So while it may be fun to cheer against Merkel as a deficit-scold, the fact is that Germany has been propping up this deck of cards for 2 decades even while it rebuilt East Germany. And still the EU zone has done little to strengthen the credentials of many of its weaker countries. (with some exceptions - Ireland's problems weren't structural, but mostly due to the financial tsunami, while new entrant countries like Poland are more stable than a number of incumbents).

And Germany didn't loan to Europe purely from speculation - there's a ton of WWII-schade still left to pay off, so that Berlin has responded to this kabuki as thinly-veiled charity, and the beggars never fail to play off this guilt.

However, this time the charity has proven dangerous - the debtors are lining up outside the door, and they no longer give the pretense of being contrite and responsible. It's Germany's fault, it's the (Euro) banks fault, it's the EU's problem - everything but their own behavior.

While Hollande may have ridden this sentiment to victory, the next budget is his, and he won't get cooperation from Germany without some significant spending from Paris. French industry has been unusually productive while others reel, but it's already overtaxed, overvacationed, over-early pensioned. 

The challenge is that Krugman's idea of stimulus spending works when there's industry to be stimulated. But when it's dried-up shipping and tourism, and paying for lying on the beach, total economic velocity drifts towards zero.

The ones who need austerity are the ones who are protesting and can't produce anyway, while the ones who could benefit from stimulus are already producing and will be asked to pay more so as to produce less.

Unless some hero can find some unwatched golden apples in the Hesperides, Hollande will soon be begging for a 3rd way. What that way is, Krugman hasn't written yet up on Olympus, but likely the Greeks will still find the need to respond to the wrath of the Gods. Perhaps they can start with Aesop, say The Ant and The Grasshopper.

This is pretty scrambled, Pickles. Reads to me like you devoted 2/3 of the blog to the Greeks, then trying to smuggle the Trojan Travelogue into Paris. Except it won't fit under the Arch.

For example, you have to start by making the Greeks the baddies, and the Germans the goodies. So Germany is "propping up" something or other, a line which only makes sense if you keep one eye closed - the monetary and exchange rate eye. I mean, the Greeks are stuck with a monetary policy and exchange rate that's determined by the Germans, and set FOR the Germans.

It's an old problem, of one exchange rate for a diverse economy, and one that we deal with it in Canada all the time. It's also one of those things that - when humanity finally comes to figure it out - we'll look back and realize we spent decades suffering under, and decades blaming the ne'erdowells of the poorer regions, when most of the problem was.... the limitations of our 20th Century exchange rate and monetary tools.

That is, a country or region that faces enormous unemployment cannot reduce their exchange rate, cannot lower interest rates far enough, cannot do what needs to be done. There are about 1001 historic examples that show it has nothing to do with how hard-working or lazy or productive a culture is. Give them jobs, give them opportunities to make some money, and they'll start, and soon, they'll all dive in.

And yet, the poorer regions ALWAYS get lambasted with the morally-laden terms - as you do with the Greeks - and the weaknesses of the culture are dragged out and flogged. When I could easily roll out an equally offensive set of cultural characteristics, which are shitty economically, can be trotted out for the guys perceived as "winning."

For example, the German trade surplus - oh so virtuous! - mathematically REQUIRES other nations to run a deficit. I could argue that the sluggish, stolid, anally-retentive Germans are just not up to the game of actually enjoying life and having a good time.

You then shift ground - as though the Greek and the French economies are similar - and do this same thing to the French. What it amounts to is you want to smear some of the same lazy cultural butter onto them. For example, you note they've been "unusually" productive, even while taking such long vacations, and pension each other off so early, etc etc. Hello? The story of the 20th Century includes chapters where nations decided to reduce working hours, reduce working weeks, restrict labour market access, and introduce early retirements, with the result that... things worked better than ever. Why bother trotting out this old idiocy of the Right as having anything to do with anything here? (Yeah, hey, it musta been those Irish and Spanish budget deficits that did them in.)  

When you're faced with mammoth unemployment, and 0% interest rates, the smart thing to do is to head in the French direction, now just as much as 100 years ago. 

In my view, Merkel isn't just a deficit-scold, she - and those like her - are morons. Krugamn's no god, but these people are destructive fools. They're the same moralistic, self-righteous, conservative know-nothing full-on market faith morons that gave us that last grand decade of disaster. And their record this time round? Appalling. Because THIS crash wasn't brought about by government overspending, or lax working hours. This crash has been brought to us by the private guys, the ones screaming against pensions and vacations, the austere ones, the bankers, the number-crunchers... 

France is not Greece. To argue against stimulus in France on the basis of Greek tax-avoidance is nonsense. 

Reset.

Try this:

- some viewers from this side of the pond think Hollande's election is good for the Greeks. Stimulus for France? Fine (not sure 75% tax rate works, but whatever). For Athens? Let them eat grape leaves. (unstuffed)

- viewers from this side of the pond often think of France as socialist, thus unproductive. Strangely enough, they're able to be productive *AND* spend August sunning and retire at 55, etc., etc. Must be in the wine - Chilean hasn't brought the gusto out in me yet. Yes, this is the goal of work - to get time off with lots of money to blow. Well done, lads.

- the Greeks have been irresponsible. And they're a 2-trick pony. That doesn't slander every other economy - aside from basting Berlusconi a bit, Italy has plenty of diversity. Romania makes Greece look bad. Turkey makes Greece look bad. Get the idea?

- I'll make it clearer - "Germans not quite as bad as reported". Satisfied? Who knows, one day I'll make such a disclaimer about Nova Scotia. If my conscience lets me. But in any case, as anal as they are, the Germans manage to have hight taxes, good services, worker involvement in corporate management, and bail out the rest of Europe. I know I should feel bitter. In fact, I am.

- Did I mention being a deficit scold doesn't work? Oh, right, thought I did. Yes, much as I'd love to stuff the Greeks for being irresponsible (and shits to the Turks, but that's an side issue), it won't help their economy, nor is throwing money at them likely to (except for building up the Swiss economy - gotta love that free flow of assets).

- Yes, the banks - especially Goldman Sachs, our propped-up little bastard love child. No matter which way we turn, he's got his dick in it again. Send him to his corner - for 7 seconds, until he throws another fit (and buys another dozen politiicians).

- I think I inferred Ireland was financially sound, when banking malpractice and subsequent EU "moron"-ness, as you put it, took them down a notch. Or 2. Or 10. Was this defending Merkel as some kind of wunderkind? Hard to fathom.

Personally I think you just begrudge my good looks or that I had the sense to get out of child pornography when I did. In any case, your grumpiness and obliviousness to detail are more pronounced than usual. Feeling under the weather? Would love to send you a bottle of absynthe to cheer you up, but alas, too prone to spoilage.

 

 

 

Of course I'm grumpy, I live in goddamn Greektown. Everywhere I go, this is what they talk about. The other day I'm at my hippie chiro, she's dry-humping my leg back into place, and babbling about whether the Greeks should revolt or just go to the beach. (I told her maybe she should concentrate a little more on her work, dammit, or I'd be off to Ilsa's office.)

My problem was that while you're saying some sensible things, you've got them pasted under a headline that might as well have come from Lyndon LaRouche. "Hollande's Dilemma: Austerity Vs. Insolvency." You know, you can scuff that up as much as you like, it's not a useful way to see things. For instance, no matter how you slice it, Germany the European nation which is closest to France in terms of Public Debt as a % of GDP. so where's your "Merkel: Fat-Headed Idiot or Just-A-Big-Fool?" headline?

In a similar vein, the quip about French industry being so hard-done-by continues to strike me as having been based on prejudice more than good economics. That is, they do really quite well, given conditions which American RW economists would have you believe would have led to their total collapse. My conclusion? RW American economists are morons. 

If you had just written on the Greeks, fine then. They're economic goofballs who've fucked themselves into the floor. BUT. The German idea that there is a path from global-austerity to Greek-recovery is laughable. The more this fabulous austerity has kicked in, the worse things have gotten. So if I'm Greek, which I'm not, yet, I'd be happier that the French are gonna restart spending money.

But today, no matter how you taunt me, my mood will remain excellent. After all, my leg works just fine.

I think you'd do better with Ilsa. Deep massage, knows when she's off work as well, and if there's humping to be done.... well, it'll cost you extra but worth it.

Regarding LaRouche, well, his fancy pants daughter is the you-go-girl now, no more prune face fronting the operation. Better, eh? Imagine Elle with a quasi-fascist lede and pictures of refugees out of 1984? With waxed bodies and no tan lines?

In any case, the austerity vs. insolvency was meant for Greece, as prelude to my 3rd way, which is some new agey tripe involving prisms and Acropolis laser lights - might even get Vangelis and Jon Anderson if they're still alive.

Once again, no, I don't see Greek path from austerity anywhere but through the Augean stables. Or at least up to and into, not sure the path leads on from there. But what to do with an insatiable politice - just give them a larger line of credit, let the good times roll? Hope they learn what a factory means, or how to program?

Again, re: French, I didn't say they were hard-done-by - I said they were quite successful and productive, even though obviously a call for more stimulus implies they'd like to do better. And when the French spend, everyone's happy - especially old Strauss-Kahn. He'll get your 3rd leg fixed up in no time flat. Of course he doesn't know exactly *how* it's done, and figures it just happens for free, from gracious and grateful chorus line girls. That's French capitalism for you.

"The ones who need austerity are the ones who are protesting and can't produce anyway"

Hmmm...

You offer no solutions as far as I can see apart from more of the same austerity with a bit of sanctimony slathered on. Nice.

So here's a shot at something a bit more constructive:

What the Greeks need is for

1. the ECB to target inflation at around 3-4% EuroRegion wide, instead of the current 1.5% which is leaving them in an untenable deflationary environment

2. the ECB/EU/IMF to let them run the deficits appropriate to a country at the bottom of a deep deep business cycle, i.e. a primary deficit of, say, 15%, and to let them do so at reasonable rates backstopped by the ECB. 

I'm just a country boy - I can tell you how best to plant the back 40....

A said a 3rd way between austerity and EU largesse. What that means, idunno.

Certainly äusterity doesn't mean inflationless, to pick on a German scab. So #1, fine.

#2, I"m not so sure what that means. Appropriate to *WHICH* country? Will Greece accept *ANY* conditions? (i.e. the Greek government that can sustain any significant popular support?)

Remember how Greece negotiated over Cyprus. The Turks came in with a bunch of compromises and concessions, worked hard to meet the deadlines, the Greeks told them to get fucked, they weren't budging on anything. And the EU let Cyprus in under Greek conditions.

Well, that bit of soap opera didn't cost the EU money. But in this case, it'll cost not only for Greece, but also the precedent set for others. Will 15% be enough for the Greeks in the street? Why not 20%? 25%? The EU let them into Eurozone despite better judgment - maybe their "lucky" streak will keep running.

 

Greece cannot possibly recover with Germany controlling monetary policy for itself.  For better or for worse, Germany already agreed to share its economic fate with the rest of the EU.  That ship has sailed.  Now that downside risk has appeared in this arrangement, the Germans are balking.  That's not on the menu.  Shared economic fate is on the menu.  Unless you or someone else can actually articulate a "third way" that is not only specific, but mathematically feasible, there will remain two solutions: 1.) Germany can yield its position and accept that it must engage in policy that will benefit the EU as a whole, including Greece, or 2.) Germany can continue to insist on austerity, which is mathematically equivalent to insisting on a second recession for the EU right now.  Moralizing and cultural butter aside, there isn't any middle ground between these positions.  Mathematically, rates of inflation and interest must be allowed to change in a way that Germany currently finds undesirable in order for the EU to get beyond its debt crisis.

Well no, they can tell Greece to go get stuffed and kick them out of Eurozone.

The attitude that Germans have to help no matter how obstinate the Greeks are is exactly what drives the Germans to their worst.

West Germans tightened their belts for 23 years to bring East Germans back into the fold. They have no appetite for more greedy freeloaders, and 67 years after WWII, they're getting less interested in guilt trips and more interested in shared responsibility.

Slovenia's passed Greece in per capita GDP; Czech Republic's almost caught up; Poland is 1 1/2 times bigger in total GDP, Turkey's 2 1/2 times. 30 years in the EU and Greece has trouble competing with Iron Curtain countries. Color me unimpressed. If Germany's going to hand out cheap money, they can hand it to Romania and Bulgaria.

And after that, Spain, Italy, and Ireland.

Greece is a sideshow and has been all along. It's too small to drag down the rest of Europe or to make much of a difference if it leaves the EU.

But German austerity is killing far bigger countries than Greece with far more functional governments.

If the whole point of the EZ is just Germany picking winners and losers, then they should never have gotten involved in a currency union.  The problem is that they did that.  Attitudes, Greek, German and otherwise are beside the point.  As Genghis has likewise pointed out, the problem is not a future EZ without Greece.  The problem is an EZ that is destroyed by an economic policy that is based on punishing Greece instead of fixing widespread economic depression across the EZ.  That is what could cause the EZ to fall apart.  Fixing Greece will be relatively cheap compared to the potential damage done by insisting on a prolonged depression.  Countries like Spain and Ireland are likewise being harmed by the policy preference of the Germans, who seem to be willing to concede nothing - not a bit of their trade surplus, not a basis point of inflation.  If they wanted to be monetarily independent from countries like Greece, they should not have married their currency with them.  They did.  For all of the moralizing over the feckless Greeks, what about the fair-weather Germans?  More to the point, how does any of the international moralizing actually address the economic problems?

Greece can't stay in the Eurozone and devalue like they need to in order to recover.  See Iceland.  The political question that must then be considered is this: What will the political implications be for the future of the Eurozone if Greece exits, especially if Greece is then able to mount a recovery?  Will Ireland, Spain and others continue to hang in there for the long, hard slog?

Point being, they can chuck Greece out, but they still have to come up with a growth strategy for Italy, Spain, Portugal.... Not a group suicide pact that the Germans seem gunning for.

However the Germans haven't been "fair-weather". Even now they're footing the bill, and they're finally sticking to their guns on the bailout. Too bad they're wrong this time, though we still don't know which 3rd way is right. I doubt if it's an unlimited line of credit to Greece, though other southern countries, might be so.

" If they wanted to be monetarily independent from countries like Greece, they should not have married their currency with them." - that's not terribly fair. Germany took a chance both because of past guilt and the chance to build up the zone - which has overall worked up until 2008. Greece hid many of its problems via Goldman Sachs et al, and didn't collect its taxes as obligated. There aren't many "countries like Greece" in the EU. Ireland for one has worked quite hard and quite successfully. As have the new East European countries.

"#2, I"m not so sure what that means. Appropriate to *WHICH* country?"

Well, obvs I had in mind 'appropriate to the depth of the recession'. One generally wants (tho not you personally, I see) fiscal policy to be counter-cyclical, where any given country runs deficits in recessions and surpluses when growing above trend. The exact amount that is reasonable for any given country will vary, depending on the output gap, productivity growth and so on. That's why I threw out 15%, but any reasonably viable proposal on the part of the triumvirate will involve some consideration for the counter-cyclical function of fiscal policy, and a revenue stream sufficient to cover spending when the economy is running at full capacity. I'm sure the number-crunchers can come up with a more definite figure with the pretty standard models, and I'm guessing it's somewhere between 10 and 20%.

But demanding - and apparently now ... getting (!) - the Greeks to wring out a primary surplus at this point is totally nuts. Because it's just going to keep them in a negative feedback cycle of cuts in government spending leading to cuts in aggregate demand leading to falling revenue leading to further cuts. And

"Will 15% be enough for the Greeks in the street?"

- Wow. That's a weird objection. Right now they've got the Greeks producing a primary surplus, and you're just going to ... assume ... those lazy Greeks will reject a reasonable, economically viable offer, so ... fuck 'em? How about we wait for the triumvirate to make an offer that isn't dickishly outrageous, and how about ... IF the Greeks reject that ... THEN start to condemn 'em.

How's that for a plan? Judge them for their actual reaction to the actual plan, rather than their hypothetical reaction in your absinthe-drenched imagination? HEH?!

Surplus planned for next year, as all tooth fairies do.

 

Greece had one million companies in 2009, but 250,000 have since closed and 300,000 more do not pay their workers on time, according to Antonis Samaras, leader of the conservative New Democracy party.

 

Greece will have to cope with an even deeper recession than expected in 2012, according to the country’s central bank. In a revision to its previous estimate a month ago, it suggests Athens will find it even harder to meet its fiscal targets, meaning yet more pain for the population.

The Bank of Greece forecast the economy will shrink by about 5 per cent this year – the fifth consecutive year of contraction – compared with its previous estimate of 4.5 per cent just a few weeks ago. But the outcome could be worse still if there are delays in implementing structural reforms, the bank said.

The Greek economy never runs at full capacity, obviously, but the chances of that are even more remote.

In terms of dickish proposals, the Greeks excel at them. I've obviously got a chip on my shoulder, after living a bit through the Macedonian embargo and the attitude towards Turkey (shared by much of the EU as well....). 

But what's the basis for running huge deficits when shipping & tourism were going well, and then refusing to pay now? Blame the rich, blame the IMF, blame the Germans (with obligatory swastikas) - is it really all 3? 

In any case, the issue is less about whether to prop up the Greek economy, but whether there's a real way to prop it up that will actually work. Whether lazy, incompetent, tunneling, statist or other description, there's a serious question what efforts at renewal will actually work. Of course Germany can just head to Western Union and wire money - crisis solved.

 

Latest Comments