Archive for the ‘Eurozone Crisis’ Category

The Far Right and the European Elections

Michael Stephens | June 10, 2014

C. J. Polychroniou, reflecting on the results of the European Parliament elections:

The stunning victory of Marine Le Pen’s National Front in France that came in first with 25 percent of the vote—when it had won less than 6.5 percent in the last European elections—is quite indicative of the general political and social trends in Europe today. The parties of the far right scored quite well in Europe’s parliamentary elections …

What all these parties have in common … is their opposition to the current EU regime, which they blame directly for the loss of national sovereignty, the high levels of unemployment, the corrosion of traditional beliefs and values and the massive flows of immigrants.

[...]

[I]t is also not clear whether the far right parties will form a political alliance amongst themselves in the new European parliament. It is not certain at all that UKIP, or even the Finns Party, will collaborate with Marine Le Pen’s National Front. In short, it is highly unlikely that the parties of the far right will pose a systemic threat to the status quo in the EU.

What seems to be happening in Europe today is that the far right is simply taking advantage of the growing bitterness and resentment all across the continent towards the “New Rome”[*] and citizens’ lost faith in the ability or willingness of mainstream political parties to secure a better tomorrow for themselves and their children, let alone protecting the common good.

Of course, the key question here is why is it mainly the far right, and not the left, attracting voters dismayed with the status quo. This is by no means an easy question to answer. However, until the latter happens, the odds are that “New Rome” will continue with business as usual.

Comments


Is the Eurozone Crisis Really Over?

C. J. Polychroniou | May 23, 2014

Economic pundits who predicted the collapse of the euro at the start of the eurozone crisis have been proven wrong. But those who say the crisis is over are equally wrong.

Four years after the start of the euro crisis, the bailed-out countries of the eurozone (Greece, Ireland, Portugal, and Spain) are still facing serious problems, as the austerity policies imposed on them by the European Union (EU) authorities and the International Monetary Fund (IMF) not only failed to stabilize their economies, but actually made matters worse; in fact, much worse: the debt load increased substantially, national output was seriously undermined, unemployment reached potentially explosive levels, a credit crunch ensued, and emigration levels rose to historic heights. Because of these highly adverse effects, the citizens in the bailed-out countries have grown indignant and mistrustful toward parliamentary democracy itself, euroskepticism has taken firm roots, and a cleavage has reemerged between north and south.

Take unemployment, for example. The current unemployment rates in the four bailed-out eurozone countries are: 27 percent for Greece; 25 percent for Spain; 15 percent for Portugal; and 12 percent for Ireland, the nation with the highest emigration rate in all of Europe, and whose government was actually asking the unemployed recently to leave and take jobs in other European countries.

A similarly dramatic picture emerges when one looks at current government debt. In Greece, it ballooned from slightly less than 130 percent in 2009 to 175 percent at the end of 2013 and it still growing. Ireland’s public debt, which stood at 25 percent of GDP in 2008, grew to nearly 65 percent by 2010 and climbed to over 125 percent by the end of 2013. Portugal’s public debt, which was slightly less than 70 percent in 2008, jumped to over 100 percent by 2011 and then to over 130 percent by 2013. And Spain’s public debt has surged to nearly 95 percent of GDP, standing at close to 1 trillion euros—three times as much as it was at the start of the crisis in 2008—and is projected to go over 100 percent by the end of 2014.

In short, the rest of the bailed-out eurozone countries are looking more and more like Greece when it comes to public debt—the result of the “voodoo” economics that the witch doctors of the EU and the IMF cooked up in order to formulate the so-called “rescue” plans.

The prospects for real growth in the periphery of the eurozone are grim as the EU’s current economic mindset, a set of economic dogmas that include (1) relegating unemployment to the status of a natural and inevitable (and perhaps even desirable) outcome of fiscal adjustment, (2) relying on austerity as a confidence builder, (3) treating structural reform as a panacea and (4) valuing exports as the primary engine of growth trump serve to impede recovery.

Each one of these ideas, as I spell out in detail in a public policy brief that was just released by the Levy Economics Institute, are highly flawed and, when combined, they can be deadly dangerous. They constitute tenets of an ideological “worldview” rather than empirically proven statements. continue reading…

Comments


Greece Has Returned to the Bond Markets—Mission Accomplished?

Michael Stephens | May 5, 2014

C. J. Polychroniou interviewed Levy Institute President Dimitri Papadimitriou for the Sunday edition of Greece’s Eleftherotypia. What follows is an excerpt from the English version of that interview (part one of the Greek version is here):

C. J. Polychroniou: After four years as the pariah of the financial markets, in the course of which 330 billion euros was granted/guaranteed in international bailouts in order to avoid an official bankruptcy, Greece has made a successful return to the international bond markets. Why did Greece return to the bond markets now when the country’s debt-to-GDP ratio is much bigger than it was back in 2010?

Dimitri B. Papadimitriou: The return to the bond markets was an act of pure symbolism. The government purposely made the success of the austerity program dependent on achieving a primary surplus as opposed to the return to growth in output and employment. Recall that the idea of expansionary austerity embraced by the country’s international lenders was spectacularly discredited. Thus, the Troika (IMF, EU and European Central Bank ) and Greece’s compliant government needed to invent a new metric of success, and it was associated with achieving a primary surplus as large as it could be so that financial markets can be impressed. However, no one else is impressed, especially the international lenders, for three main reasons: (1) The primary surplus was achieved by a one-off (non-recurring) excess revenue from the gains of Greek bonds in the portfolios of Eurozone’s central banks and the European Central Bank’s (ECB) holding that were returned to Greece; (2) collections of old tax revenue; and (3) non-recurring spending cuts and delayed payment of the government’s debt to the private sector, whether VAT refunds or non-payments to private sector vendors.

Finally, the return to the markets was costly to the country — the apparent low interest rate of 4.95% notwithstanding — since the interest rate of the funds borrowed from the European Stability Mechanism (ESM) is at a very much lower interest rate. To be sure, the hedge funds and the private sector [parties] buying the new bonds knew that there was an implicit guarantee from the ECB that would accept these bonds under its Outright Monetary Transactions (OMT) program. So the bonds were not backed by the progress of the Greek economy — it would be ludicrous to assume so, for an economy in continuing recession and increasing debt to GDP ratio, especially if its credit rating is still below investment grade. So, all in all, it was an act of desperation and a strategy to give the government extra help in the soon-to-be-held local and European Parliament elections.

[...]

CJP: Radical structural reforms, which include labor and product markets and blanket privatizations, constitute the second component of the conditions behind Greece’s bailout plans. First, is there in economic literature a direct connection between labor market flexibility, productivity growth and national economic performance?

DBP: The economic literature, as economists know, can produce conflicting results. It will not be surprising to find cases when statistics will prove that there is a positive outcome in terms of increasing productivity with flexible labor conditions, but this is always dependent on the level of technology diffusion. To be sure, German workers have the highest productivity in Europe along with those in the Netherlands, but it is not because they are paid less than other Eurozone workers but because of the high level of effective technology used. So they are about 70% more productive as compared to Greeks, Portuguese or Spaniards despite the fact that the latter work substantially many more hours during the week. Clearly, Germany’s and other North European economies enjoy better economic performance, but this is not due to so-called labor flexibility only. Germany is successful because it is lucky, having an extraordinary number of idle and low-wage workers from East Germany when the unification took place. Unification gave Germany the ability to hold West German wages down. But this should not be used as an example of a successful application of a labor flexibility policy. The literature also abounds in studies showing that labor productivity is not dependent on labor flexibility. Indeed, the theory and policy of “efficiency” wages, promoted by none other than Nobel Laureate George Akerlof and current Fed Chair Janet Yellen, is part of the economic research which shows there are productivity gains and other positive outcomes to firms which pay higher than market wages. All in all, then, the argument of flexible wages does not, I am afraid, hold water.

Read the rest of the interview at Truthout.

Related: “Prospects and Policies for the Greek Economy

Comments


On the Alleged Pains of the Strong Euro

Jörg Bibow | April 9, 2014

Since its most recent low of $1.20, reached in the heat of the summer of 2012, the euro has appreciated by 15 percent against the US dollar and by more than 10 percent in inflation-adjusted terms against a broad basket of currencies representative of the euro area’s main trading partners. Amounting to a significant loss in international competitiveness, representatives from a number of euro area member states aired fears that euro strength might undermine the area’s recovery from gloom. Members of the ECB’s governing council too expressed concerns about the euro’s exchange rate. ECB president Mario Draghi recently argued that the strengthening of the euro was partly responsible for the bank’s conspicuous miss of its 2-percent price stability norm by an embarrassingly large margin, adding that the euro’s strength was “becoming increasingly relevant” in the ECB’s assessment of price stability.

In truth euro appreciation should attract neither fears nor blame. The euro area’s dangerously low rate of inflation owes primarily to domestic sources. Instead of debating the euro’s external value, it is high time for euro policymakers to concentrate on getting their own house in order.  A sober assessment reveals that the supposedly too strong euro is at risk of turning into yet another scapegoat. Covering up euro policymakers’ unenviable record of staggering policy blunders is unwarranted.

Ultimately the single most relevant factor for price stability in an economy as large as the euro area is wage inflation corrected for productivity growth. The outstanding fact is that euro area wage inflation is approaching zero. Unit labor costs and business costs more generally are flat or falling. It is therefore no surprise at all that the ECB is failing on its price stability mandate. Rather, what is surprising is that euro policymakers keep on clobbering wages without remorse, apparently wishing to drive them ever lower. Seemingly justified by some holy calling to please the gods of austerity and competitiveness, euro policymakers keep on digging the hole they are trapped in ever deeper. continue reading…

Comments


Can a Parallel Financial System Solve the Greek Crisis?

Michael Stephens | March 26, 2014

In a new article, Dimitri Papadimitriou looks at the possibility of creating a parallel financial system — dubbed the “geuro” (following Thomas Mayer) — to help rescue the Greek economy:

Geuros would essentially be small denomination zero-coupon bonds: transferable instruments with no interest payment, no repayment of principal, and no redemption, that would be acceptable at par for tax payments. This kind of arrangement is well-known in public finance.

The government would use the alternative currency to pay domestic debts, unemployment benefits, and a portion of wages for public employees. And it would demand that a share of taxes and social benefits be paid in geuros.

Foreign trade would still require euros, which would remain in circulation, and Greece’s private sector would still do business in euros. The currency would be convertible only in one direction, from euro to geuro.

There’s a certain view that, if Greece weren’t in the eurozone, the ideal solution would be to devalue its currency and grow its way out of depression through exports. But since Greece doesn’t have its own currency, we’re left with “internal devaluation” — trying to boost exports through reducing unit labor costs. As Papadimitriou and some other members of the Levy Institute’s macromodeling team (Michalis Nikiforos and Gennaro Zezza) have pointed out, that internal devaluation strategy isn’t working — even though Greece “succeeded” in reducing its relative labor costs.

But what if it were possible for Greece, while remaining firmly in the eurozone, to create a financial instrument (the geuro) that would effectively operate as a parallel currency? Would export-led growth through devaluation of the new currency then become a viable possibility? The answer, according to Papadimitriou, is no, not really:

Why not stress exports? Price elasticity in Greece’s trade sector is low, our analysis shows, which explains why there hasn’t been much evidence of success in export growth. Of course exports are important, but even China, with its gigantic export-guided economy, has recognized the need to increase and stabilize domestic demand.

The value of creating an alternative currency like the geuro is not that it would enable devaluation, but that it would allow Greece to regain a measure of control over its fiscal policy: it could be used to fund the sort of stimulative policies that aren’t forthcoming under the reigning austerity regime. Papadimitriou explains in the article that a geuro-funded direct job creation program targeting 550,000 jobs (not counting the indirect employment creation) could boost GDP in Greece by 7 percent at a net cost of around 3.5 billion geuros per year. And as he points out, “there would still be a sizable euro surplus.” Read the whole thing here.

The article is based on the recent strategic analysis for Greece by Papadimitriou, Nikiforos, and Zezza, which uses the Levy Institute’s stock-flow consistent modeling approach.

Comments


MMT, the Consolidation Hypothesis, and Why Louisiana Won’t Leave Its Currency Union

Michael Stephens | March 18, 2014

In this interview with Euro Truffa, L. Randall Wray responds to some recent critiques of Modern Money Theory (MMT).

In the first segment, Wray defends the idea that we can, for the purposes of simplifying the analysis of affordability constraints faced by modern governments, safely disregard many of the self-imposed constraints on Treasury-Central Bank cooperation (this is sometimes referred to as the “consolidation hypothesis.” For more on this topic, see “Modern Money Theory 101: A Reply to Critics,” by Randall Wray and Éric Tymoigne, as well as Tymoigne’s recent working paper on Fed-Treasury operations in the United States).

In this next segment (sorry, video quality is bad, but audio is fine), Wray challenges the idea that the eurozone crisis is chiefly a balance of payments crisis.

Comments


Inflation, Deflation, and ECB Asymmetry

Jörg Bibow | March 13, 2014

It is quite interesting to see how popular myths can live on in the public’s mind and continue to cause harm and irritation even when the facts speak to totally different language. How can education fail so badly?

The particular example I have in mind here is Germans’ supposed exceptionalism in matters of inflation hyper-sensitivity. Whether or not Germans really are special in this regard, even internationally many observers seem to feel that Germans would be truly justified to be that way. Hence Germans are readily excused for doing stupid things because they seem to be justified that way. There is a highly relevant context to this today: the ECB’s asymmetry in mindset and approach.

I recently argued in a Letter to the Editors, “Beware what you wish for when it comes to ECB measures,” published by The Financial Times on February 26 2014, that there was actually nothing really new about the ECB’s revealed asymmetry regarding inflation versus deflation risks. At issue is a genetic defect inherited from the Bundesbank. In fact, there can be absolutely no doubt anymore about the ECB being asymmetric in mindset and approach, and more and more observers have come to realize that in more recent times. But there is also a long track record of asymmetric “stability-oriented” monetary policy that includes and precedes the ECB’s own life.

My letter prompted a response from a Mr Han de Jong, the Chief Economist of ABN AMRO Bank in Amsterdam, arguing that there would be a solid basis in history for Americans to fear deflation over inflation while the opposite is true for Germans, pointing to the Great Depression as the biggest trauma in US economic history of the last 100 years and contrasting it with Germany’s hyperinflation of 1922-23 (“Economic trauma scarred both the US and Europe,” Letters, March 3 2014).

This is surely right about America. While some US economists speak of the “Great Inflation” of the 1970s, which was followed by the Volcker shock and a double-dip recession in the early 1980s, this episode truly pales in comparison to the calamitous Great Depression experience of the 1930s. The memory of the Great Depression lives on in modern America. US policymakers are haunted by the ghosts of that historical episode. And that is a good thing!

When it comes to Germany, however, the story is less straightforward than is popularly held. continue reading…

Comments


Export-led Growth for Greece?

Gennaro Zezza | March 8, 2014

In a recent post, Daniel Gros asks why Greece has failed to get out of recession through an increase in exports, as he claims happened in Portugal, Spain and Ireland.
He is suggesting that the problem lies in the economy resisting structural reforms:

“In Greece, by contrast, there is no evidence that the many structural reforms imposed by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) have led to any real improvement on the ground. On the contrary, many indicators of efficiency of the way the government and the labor market work have actually deteriorated”

“So the only explanation for Greece’s poor export performance must be that the Greek economy has remained so distorted that it has not responded to changing price signals.”

Gros is therefore endorsing the Troika vision: European peripheral countries with a large current account deficit, and large government deficits, should use austerity to improve the public sector balance, and wage and price deflation to improve export competitiveness.
These policies have been devastating for Greece. Our first chart reports the level of real output: real GDP in Greece has fallen by almost 25 percent, relative to 2007, the last year before the recession started. Indeed, as we have argued, the recession in Greece has been worse than the 1929 Depression in the United States. In the other GIIPS countries the recession has been severe, but the fall in output has been much smaller. When capacity is reduced by a shock comparable to that of a war, it is hardly suprising that the exporting capacity is compromised as well.
Real GDP in GIIPS countries
Yanis Varoufakis, on Twitter, rightly commented on Gros’ post that Greek firms have been experiencing a severe contraction in credit, which is an additional reason to prevent any expansion in production and sales on foreign markets.
In addition, Greek exports were a smaller fraction of GDP, compared to the other GIIPS countries. The pattern of the response of the exports to GDP ratio during the crisis has been similar in Greece, Portugal or Spain, but as the next chart shows, exports in Greece were only 23 percent in 2007, compared to about 32 percent in Portugal or 27 percent in Spain, not to mention Ireland.
GIIPS share of exports on GDP
Last, but not least, our estimates of price elasticities for Greek exports suggest that they are low, so that increasing exports only through wage and price deflation will take a long time, and may even generate a fall in export revenues as long as the volume of exports does not grow sufficiently to outweight the fall in export prices.
Since Greece cannot expect to recover from exports (besides, export-led growth requires that your trading partners are willing to increase demand fo your products!), recovery can only come from government intervention, in one of the forms we have discussed in our last report.

Comments


Bibow on Deflation and ECB Measures: “Beware What You Wish For”

Michael Stephens | March 6, 2014

From Jörg Bibow’s recent letter in the Financial Times, reacting to an article by Wolfgang Münchau on deflation and ECB policy:

What is really new today is that wages are becoming unanchored and hence cease to provide the safety net that asymmetric central bankers habitually rely on. This is the consequence of the collective effort to restore competitiveness practised across the eurozone. Deflationary structural reforms of labour markets can only amplify this futile and hazardous process. But with the ECB applauding these efforts as the supposed panacea to the eurozone’s ills, what kind of miracle weapon can we expect the bank to deploy to halt the resulting plight?

Read the rest here.

Comments


On German Public Opinion and Illusory ECB Power

Jörg Bibow | February 26, 2014

After taking a short breather in late January-early February, the markets now seem to be back in “happy mode.” Whether the news on the economic recovery is good or bad doesn’t really matter. The current convention is that growth acceleration is under way.

That emerging markets had become key drivers of global growth was yesterday’s story, today they don’t seem to matter anymore. Developed economies are back, so we are told. The U.S. is roaring ahead, the euro crisis is over. And, by the way, central banks have no intention to really stop the party any time soon – as inflation is so conveniently low. In fact, inflation is nonexistent since labor markets are not exactly red hot and wages essentially flat. So lucky for us, or at least some of us, that at least the markets want to go up no matter what.

Curiously, not even the long-awaited ruling by Germany’s constitutional court on the ECB’s “outright monetary transactions” (OMTs) or, rather, on Germany and the euro, could rock the boat. The court expressed doubts about the legality of the ECB’s supposedly all-powerful weapon meant to bolster the earlier “whatever it takes” promise, the mere airing of which had ended the euro crisis and kick-started the brisk recovery now firmly under way. “So what?”, Mr. Market shrugged his shoulders.

The Financial Times’ Ralph Atkins reports of a banker who was even making fun of those “crimson-roped weirdos in Karlsruhe.” For apparently Karlsruhe does not matter anymore to the fate of the euro, only Frankfurt does, especially now that they have sent the case off to the European Court of Justice. The ECB is seemingly safe now to deploy its miraculous weaponry, or do anything it likes, it might even seem. Wondering whether the markets may be either deluded or wise and prescient in ignoring the ruling, Mr. Atkins seems to come down with the verdict that “Karlsruhe fallout highlights power of ECB.”

But just how powerful is the ECB, really? continue reading…

Comments