Tag Archives: Greece

A Primer on the Global Economy

The BBC has a great primer on the global economy, especially the Eurozone. Through a series of 60-second video clips, they explain the IMF, how banks go bust, quantitative easing, and the role of the ECB. They also have several articles that tackle those and similar subjects in both the Eurozone and the world economy. Very straightforward, nonpartisan information, and recommended for those who are a bit confused when reading today’s headlines.

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Why The Euro Will Fail

Not so in the case of the euro. The euro zone is a hybrid: a single currency with 17 national fiscal and economic policies. It has no common treasury, no tax-raising powers, no joint bonds and no central bank acting as lender of last resort. In good times, this did not matter. But in the worst financial crisis in decades, the flaws are glaring. Even Mr Berlusconi cruelly described the euro as “a strange currency that has convinced nobody”.

Countries cannot quit the euro without extreme economic pain, but nor is it easy to fix. Vetoes may be needed to maintain democratic consent, even if they make for poor crisis management. A blockage in one country endangers all. The markets are testing the ambiguities to destruction. Vague promises to “do whatever it takes” to save the euro are not enough. Will the ECB deploy its full resources to stop the crisis? How much intrusion into national policies are Greece and Italy ready to accept? How far is Germany willing to extend its credit? Will the euro zone’s states hang together or hang separately?

These are big questions, affecting the nature of the state, sovereignty and democracy. Mr Papandreou may have messed up his tactics, but he was right on one point. The changes needed to save the euro are so profound in nature that, sooner or later, they must have the explicit consent of the people—or they will fail.


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The Cost of Dependency

Rioters have clashed with protesters in Athens where thousands of people are rallying outside parliament to condemn new cuts.

Scores of masked youths attacked a group from a communist-backed trade union with stones and petrol bombs, and police fired tear gas.

A 48-hour general strike is under way in protest at austerity measures aimed at reducing Greece’s crippling debt.

The Socialist-dominated parliament is expected to give final approval to a new austerity bill on Thursday.

The commentator in the video adds that “no modern European country has ever been asked to cut so much so quickly,” but no modern nation so lavishly spoiled itself with money it didn’t have, and then lied about it for years. Essentially the Greeks are asking the Germans to continue to work hard to pay their bills.

There is a Keynesian argument to be made against austerity: it will lead to a contraction that will further the deficit problem. Not all economists believe that, but let us for the sake of argument say that it’s true. Are these protestors really arguing this, or are they fighting like hell to keep their (unearned) entitlements? If there were to be a Keynesian stimulus now, would these same protestors accept spending cuts in the future? When the Socialist Party is the party of fiscal responsibility, you know a nation is in trouble.

The austerity measures will almost certainly be passed to satisfy foreign lending demands. Even with such measures, the Greeks have proven themselves catastrophic to their bond holders.

Private holders of Greek debt may need to accept losses of up to 60 percent on their investments if Greece’s debt mountain is to be made more sustainable in the long-term, a downbeat analysis by the EU and IMF showed on Friday.

Euro zone finance ministers threw Greece a lifeline on Friday by agreeing to approve an 8 billion euro loan tranche that Athens needs next month to pay its bills.

But the European Commission, European Central Bank and International Monetary Fund — the so-called troika — issued a gloomy report on Greece’s ability to pay its debts.

Among three scenarios it examined, the only one that would reduce Greece’s debt pile to 110 percent of GDP — a level still regarded as high — was one in which private bond holders agreed to a 60 percent haircut.

The bond holders are required to sacrifice, but not the Greeks – who collectively act like spoiled teenagers demanding to borrow the car without having first done the dishes.

Let the Greeks default and leave the Eurozone to return to the drachma. Their bondholders will take their losses. The drachma will be allowed to depreciate relative to the Euro which will spur the Greek economy. They’ll be unable to borrow foreign money, and so will be forced into austerity. If they try to print their way out, only the Greeks will be hurt, not all of Europe. They will have to live as responsible adults, not spoiled teenagers. (The difference is that adults pay for their lunches. Teenagers believe they are free.) The rest of the Eurozone can worry about their balance sheets and the health of Spain and Italy – “too big to bail, too big to fail.” The Euro would be strengthened and its interest rates lowered. It would also be more respected as a currency and a stronger rival to the USD as the world’s reserve currency.

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“Even after he got fat, he just ate and ate.”

There is no need to buy Michael Lewis’ latest book, Boomerang – it is all available free online – but there is a reason to read it: you’ll know that it is selfishness and shortsightedness that devour us. We are genetically programmed to live in a world of scarcity, but when given low-hanging fruit we devour it, no matter how rotten it may be. We eschew delayed gratification, and thrive by living in the moment without regard to the future.

Boomerang is a collection of five long (and hilarious) articles of Lewis’ “financial-disaster tourism,” originally published in Vanity Fair. All are linked below for those who don’t mind reading 40 pages on their computers. I’ll expound on two of the articles here.

The Icelanders were tired of fishing, and so became investment bankers – some with only a few days’ worth of training – and sank their nation.

The Irish, like Americans, mocked those who said their real estate was a bubble. The government of Ireland eventually confessed to losses of 34 billion euros, which is the equivalent of the U.S. losing $3.4 trillion!

The Greeks were perhaps the most ridiculous of the lot: $1.2 trillion of debt, or a quarter-million dollars for every working Greek. This was not due to a subprime crisis, but to perennial lying by the government about how much it was spending, and reckless disregard by politicians who showered more and more benefits on people who were increasingly less productive.

The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.

The Germans made the mistake of trusting everyone else, including the Irish and the Americans. Lewis writes specifically about California and San Jose, but one fears he could easily have written about many similar states and municipalities. But California – with its natural riches so skillfully squandered – is a great pick.

[Chuck Reed, the mayor of San Jose, has] a problem so big that it overwhelmes ordinary politics: the city owes so much more money than it can afford topay to its employees that ic ould cut its debts in half and still wie up broke. ‘I did a clculation of cost per prublic emploee,’ he says, as we settle in. ‘We’re not as bad as Greece, I don’t think.’

We are not as bad as Greece. Some consolation.
We are still bad, and certainly worse off than we were before, both fiscally and morally. The fiscal reality is well known. Well, the specifics may not be well known – how broke we are exactly – but the average American knows we are broke. That’s a start. The moral bankruptcy is not spoken of nearly enough. Living outside one’s means or living off of unearned income corrupts us morally. Work does not just make us better off, it makes up better.

In Greece, flawed character – corruption, tax evasion, bribery, etc. – is the name of the game. Voters demand more and more services of the state, while working and paying less. The result is an utter disrespect of the civic virtues of citizenship and of their fellow citizens themselves.

The Greek state was not just corrupt but also corrupting. Once you saw how it worked you could understand a phenomenon which otherwise made no sense at all: the difficulty Greek people have saying a kind word about one another. Individual Greeks are delightful: funny, warm, smart, and good company. I left two dozen interviews saying to myself, “What great people!” They do not share the sentiment about one another: the hardest thing to do in Greece is to get one Greek to compliment another behind his back. No success of any kind is regarded without suspicion. Everyone is pretty sure everyone is cheating on his taxes, or bribing politicians, or taking bribes, or lying about the value of his real estate. And this total absence of faith in one another is self-reinforcing. The epidemic of lying and cheating and stealing makes any sort of civic life impossible; the collapse of civic life only encourages more lying, cheating, and stealing. Lacking faith in one another, they fall back on themselves and their families.

Such attitudes exist in our own society as well, though fortunately to a much smaller extent. Some areas excel in this Athenian arena though. Take Vallejo, CA.

Back in 2008, unable to come to terms with its many creditors, Vallejo declared bankruptcy. Eighty percent of the city’s budget—and the lion’s share of the claims that had thrown it into bankruptcy—were wrapped up in the pay and benefits of public-safety workers. Relations between the police and the firefighters, on the one hand, and the citizens, on the other, were at historic lows. The public-safety workers thought that the city was out to screw them on their contracts; the citizenry thought that the public-safety workers were using fear as a tool to extort money from them. The local joke was that “P.D.” stands for “Pay or Die.”

Thus a society begins to unravel.

The problem with police officers and firefighters isn’t a public-sector problem; it isn’t a problem with government; it’s a problem with the entire society. It’s what happened on Wall Street in the run-up to the subprime crisis. It’s a problem of people taking what they can, just because they can, without regard to the larger social consequences. It’s not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They’d been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans.

Why exactly do we have such high personal indebtedness? It’s not due to the current recession; our indebtedness predates it. But rather it is due to our desire to keep up with the Joneses. It is due to our materialism. I have a right to the iPhone. I have a right to those designer jeans. Everyone has a right to everything that is new and good and desirable. Walmart reintroducing lay-away might not be a bad indicator when all is said and done. It may mark a return to more personal responsibility, which may translate into more public responsibility. We need more delayed gratification and savings, during good times and bad.
Either buy the book or read the articles online, but either way, read Boomerang.


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