Europe’s appalling handling of a euro crisis that was always going to happen, given its faulty architectural design, has triggered an electoral result in the recent European Parliament elections that is a clarion warning that Europe is decomposing. And it is decomposing precisely because of the Left’s spectacular failure to intervene both during the construction phase of Europe’s economic and monetary union and, more poignantly, after the latter’s crisis had begun.
It’s official! The Greek government now confirms that the much lauded Greek government primary surplus for 2013 was a mirage created by the return of Greek Statistics (see this recent post).
And also that the statistical trickery involved had the full approval of Eurostat, of the troika, of Berlin etc. The ‘confession’ has come in the form of the deafening silence in response to the revelation that approximately €5 .4 billion was taken off government expenditure through the discovery of a non-existent ‘white hole’ in the government’s revenues. Yesterday, a tweet from a spoof account in the name of a Finance Ministry official reminded me that the New Greek Statistics are highly reminiscent of the Old Greek Statistics.
When Greece imploded, back in 2010, we all thought that, at the very least, the time for truth had come. The bubble had burst, people were to suffer immensely, but at least we could envisage the start of a new era during which Greeks, Germans, the Irish, the Spanish, Europeans in general, would try to re-build on solid ground, would avoid erecting pyramids on a foundation of lies, would tell citizens the truth on our macroeconomic fundamentals.
Have you heard the one about Greece’s Eurostat-approved 2013 primary surplus? Well, you should not believe it. Here is why. Eurostat has just approved the Greek statistical service’s (ELSTAT) figures on the general government’s primary surplus of around 0.8% of GDP. Were that true, it would have been of great significance. Not because Greek debt would have, magically, become sustainable but, rather, because it would have meant that the Greek government would have acquired great leverage in its negotiations on the impending restructuring of Greece’s public debt.
Put simply, it would mean that the government could, at least in theory, suspend debt repayments to the troika while the negotiations are continuing, without having to renege on its payments of salaries, pensions, and suppliers. Alas, the Greek government’s 2013 primary surplus is a statistical mirage. Moreover, it is a mirage purposely concocted by Eurostat and ELSTAT under the watchful, and conniving, eyes of Berlin, Frankfurt and Brussels. Mindful of how weighty these charges are, I list my evidence immediately below.
In his latest Financial Times column Wolfgang Münchau concurs with much of what I have written on the Greek social economy’s deep coma and on the reasons why investors are piling in but goes on to suggest that Greece should seriously consider exiting the Eurozone.
I offer here an evaluation of his argument. In brief, I argue that, while Münchau’s assessment of the situation on the ground is spot on, the use of the ‘nuclear option’ (i.e. threatening to exit the Eurozone) is neither desirable nor necessary as a means of forcing Europe to change its ways. The Grand Greek Paradox of the day, meaning the impressive rise in the assets of a nation more bankrupt than ever, is neither that grand nor that much of a paradox. There is, indeed, a simple reason that international investors are piling in to buy some of the nation’s paper assets (e.g. the freshly minted government bonds and shares in some banks), even though the country is economically kaput and its government is steeped in long-term insolvency more than ever. What’s this simple reason? The short-term decoupling of the value of paper assets from Greece’s real economy.
Take for instance the new bonds, worth €3 billion, issued last week. This new debt has been added to the existing stockpile of €320 billion for a shrinking economy with a nominal GDP, currently, around €180 billion. To service it next year alone (in 2015), the government must achieve a gargantuan primary surplus of 12.5% of GDP and use it all to redeem debt (while Greeks are in the clasps of untold misery and only 10% of the 1.3 million unemployed receive any benefits). Why would a self-interested investor buy these new bonds, in view of the unsustainability of the country’s overall debt? The answer is, of course, that Berlin and Frankfurt have signalled to investors that there is nothing to worry about.
Escalation of the Crimean conflict and the risk of an invasion by Russian troops further into Ukraine have raised a concern about international mechanisms of deterrence, economic sanctions being among them.
Although Brussels and Washington made rather harsh statements at the outset of the crisis, it is quite improbable that they will impose heavy sanctions on Moscow. This means that the international community lacks an adequate response to Russia. The Russian Federation is the third largest trading partner with the European Union (next to the US and China) with $417.4 billion in trade in 2013. Therefore economic sanctions could have an adverse effect on Europe. Considering the current state of several European economies, the results would be grave.
Russia is one of the world’s biggest oil producing countries and the world’s second largest oil exporter. It supplies most of its oil and gas to the European Union. The only way to affect the Russian economy and deter Putin would be to target Russia’s energy sector. The European Union would have to refuse to purchase Russian natural gas, which presently they are not be able to do. In 2013, Russia’s earnings from oil and natural gas exports amounted to $229 billion.
After the United States had lost its surpluses, some time in the late 1960s, the system of fixed exchange rates and highly regulated capital movements, which had nurtured capitalism’s Golden Age, was condemned. Its inevitable collapse could not but push the dollar down, release the bankers from their thirty-year-old restraints, and wind back rights and services that labour had wrestled from capital since the war.
Mrs. Thatcher’s 1979 electoral victory was a pivotal moment in the post-Bretton Woods era. It marked a moment of truth when the establishment proved less (small ‘c’) conservative than the working class and the Left. Feeling its grip on power weakening, Britain’s bourgeoisie reluctantly, yet consciously, gave Mrs. Thatcher the green light to swing her wrecking ball through the steel industry, the car and lorry factories, the coalmines, the shipyards; though each and every work site where the “enemy within,” i.e. organised labour, congregated. The Left’s reaction was to defend livelihoods by seeking to defend a business model that business itself had no longer any interest in. It is small wonder, therefore, that the Left was mightily defeated, as the threat to strike becomes pointless when the capitalist is no longer interested in…production.
The Thatcher governments were not responsible for the tidal change that swept Britain’s industrial model overboard. The decline was evident before 1979 and, as we have witnessed in continental Europe ever since, labour and industry were on a losing streak everywhere. However, what Mrs. Thatcher did do was: (a) to create the ideology necessary to present de-industrialisation as a progressive, populist political project, (b) to nurture, foster and inflate a twin bubble (real estate and finance) that drove British capitalism at a time of industrial subsidence, and (c) to export her new-fangled ideology and her twin bubble to the rest of Europe.
In June 2012, at a time when central banks had pushed interest rates to almost zero, Italy had to borrow at 8% to re-finance its gargantuan $3 trillion debt. Spain was in even direr straits.
With national income falling by 2% annually, these interest rates meant that the national debt mountain was rising by 10% every year. In one word, insolvency! This was the spectre hanging over major European nations in the summer of 2012, guaranteeing that the Eurozone was finished. Today, Italy’s and Spain’s interest rates have fallen to a more manageable 3% to 4% and national income has stabilized. There is even fast money that flows into the crippled European banks, even into the dismembered Greek stock exchange, seeking bargain-basement prices for certain woefully depressed shares. These observations can easily be mistaken for signs of light at the end of the tunnel. But ‘mistaken’ is the operative word.
Stabilized public finances, continuing economic and social disintegration
Europe’s apparent ‘stabilization’ can be pinned down to two factors. The first, and most crucial, was the ECB’s intervention in the summer of 2012. Moments before the Eurozone blew up, with devastating impact upon the rest of the world, the ECB stepped in with its nuclear option, also known as the OMT Phantom Program (OMT standing for Outright Monetary Transactions and ‘phantom’ because it has not been activated, so far): ECB President, Mr. Mario Draghi, former Goldman Sachs and Bank of Italy golden boy, issued a stern warning to bond dealers the world over: “Bet against Italy and Spain and I shall blast you out of the water. I shall print as many euros as I need in order to buy as many Spanish and Italian bonds as necessary to bury you in your filthy bets.”
Those who have followed me may think I see no value or place for bitcoin, but I actually do. So I’ll lay out my thoughts about how to rescue it and turn it into a currency that is stable and changes things.
I don’t think it is possible to invent an electronic unit of exchange and store of value that won’t have bitcoin’s serious problems without bringing the state’s power to create money into the picture. It can’t support reserve banking, it can’t be created as needed to support a serious economy, it is subject to hoarding, and it is vulnerable to attack. In addition, bitcoins inevitably suffer attrition due to various loss accidents. I think the average loss rate for bitcoins already equals or surpasses the rate of creation.
There is no possibility that the anarcho-libertarian anti-gummint fantasy of a currency outside of the state can ever become a widespread reality. I agree with this anonymous Harvard blogger about that. (I have problems with some technicalities, but the article overall right.) My favorite quote about bitcoin’s ability to take over the world as a non-government backed currency is from Rohan Grey:
Geoffrey Gardiner is one of the smartest, most knowledgeable banking mavens I know. I only quibble when he suggests, “[Bitcoin is] a very clever practical joke by someone who is having enormous fun exposing in the most sophisticated way imaginable the naivety of clever mathematicians, economists and/or rich speculators…[or] The cleverest con trick ever conceived,” because he is too kind to say ignorance was the cause. But ignorance, propagated through a community of bright people, is what I think. For a more academic analysis of the errors of bitcoin, my analysis, “The False Premises and Promises of Bitcoin,” could be useful. Here I will limit it to the most core problems: the scarce commodity currency idea (i.e. gold standard) is wrong; the Federal Reserve is what keeps us all afloat; and it is impossible to run a bank with bitcoin. The most primary error lies in the assumption that the gold standard was something good, and therefore, bitcoin should be modeled on gold.
For those not familiar with bitcoin and its beginnings, bitcoin was created by Satoshi Nakamoto. NPR’s Emily Siner explains how elusive he has been. “The hook is, no one actually knows who Satoshi Nakamoto is,” Siner writes. “In 2008, he/she/they released a detailed concept for a self-regulating crypto-currency and wrote a whole bunch of incredible code to support it. But Satoshi Nakamoto stopped responding to emails in 2011. It’s been a wild goose chase ever since. Satoshi Nakamoto’s concept is that of a democratically organized currency: no government regulation, no centralized bank. It’s been embraced by, among others, libertarians trying to undermine monetary regulation policies and entrepreneurs trying to avoid financial corruption in developing countries.”
With just a few months until the upcoming double elections in Greece, the political system has never been more in a state of flux across the political spectrum.
The past 5 years of economic distress and austerity have put pressure on the country’s political dynamics while prompting many Greeks to reevaluate their basic values. The result has been general revulsion at the status quo, prompting a rise in the popularity of far right political parties. Greece used to have a well-established bipolar political system in which no third party that could play a meaningful role in forming a government, as the ruling party had a built-in ability to get reelected, making the opposition obsolete. The tendency of large blocks of voters to follow the ruling party rather than individual MPs meant that three to five other parties typically made it to parliament by receiving less than 10% of the vote, and had no real ability to block legislation put forward by the ruling party.
This created a strong client culture in which 70-80% of the population where split into two major groups – many voting for one party only to prevent the other from coming to power, and a system catering to nepotism, favoritism, corruption, influence peddling, and vote buying. Everything from parliamentary seats to the number of public sector employees that were to be hired could be bought. Fueling this was a culture that flourished over the past 40 years, where minimum effort, the absence of risk and entitlements from the state became the rule. Private sector initiative, entrepreneurialism and risk taking became ever rarer.
Moralizing and generalization have always been terrible foundations for public policy.
Conservatives have a point: condemning people who want to get richer as ‘greedy,’ and subjecting them to punitive taxation, is a sure path to keeping society dull, impoverished and unfair. Where they are wrong is in interpreting a recession as the inevitable retribution exacted upon a society of prodigal sinners, who must now re-pay their ‘debt’ through austerity. This biblical economic ‘tradition’ is a sure path to greater private losses and public debt.
While one’s view at a concert will certainly improve if one stands up, when everyone stands not only is there no benefit to any but, additionally, each ends up needlessly fatigued. Generalizing from an individually rational act, or even from a personal virtue, to a public policy recommendation ignores the simple fact that what is good for one may not work when everyone practices it.
The responses of many to my piece on Bitcoin, “Bitcoin and the dangerous fantasy of ‘apolitical’ money,” reveal a powerful tendency to underestimate the ill-effects of deflation on a social economy.
This tendency to underestimate deflation’s deleterious impact matters beyond debates on Bitcoin per se. For example, in Europe the incapacity of the European Central Bank (ECB) to act in the face of deflationary forces has revealed the same type of misunderstanding, as many commentators fail to recognise that deflation is a very serious threat and that the ECB’s lack of weapons against it constitutes a major weakness. In this post I return to the problem of deflation in a Gold Standard-like monetary system (e.g. Bitcoin or, indeed, the Eurozone itself) but conclude that, almost paradoxically, the technology of Bitcoin, if suitably adapted, can be employed profitably in the Eurozone as a weapon against deflation and a means of providing much needed leeway to fiscally stressed Eurozone member-states.
Is deflation really a problem?
In a recent debate, I was confronted with the argument that deflation is a godsend. “Poorer people crave lower prices,” I was told, “and they cannot understand why ‘elitists.’ like yourself, oppose them.” Of course people, especially those who struggle to make ends meet would prefer lower to higher prices all things being equal. But under the heavy shadow of deflation other things are not equal. Deflation is indiscriminatory. Once it sets it, all prices subside, including the price for labour. In fact, wages tend to fall faster than prices of other goods during deflationary times, leaving the weak poorer. Worse still, deflation reduces investment which, in turn, raises unemployment.
Peter Bofinger’s proposal for Euro-bundles (see here for an introduction) serves the noble purpose of rekindling the debate on the Eurozone’s fiscal and monetary incoherence.
The idea behind Euro-bundles is to issue a common bond without joint liability that the ECB can then purchase in the context of a monetary policy that uses quantitative easing to fend off deflation, with the welcome side effect of lessening the Eurozone’s borrowing costs. While we shall be arguing that Professor Bofinger’s Euro-bundles are ill- conceived, we applaud his idea of a common bond involving, in some capacity, the ECB. This idea points in the direction of a genuine solution to the Eurozone’s fiscal and monetary fragility.The problem with Professor Bofinger’s Euro-bundles
Euro-bundles are not new. Indeed, they are virtually indistinguishable FROM the bonds issued by the EFSF (an SPV hastily conceived in May 2010 to raise the funds necessary for the Periphery’s ‘bailouts’) and by its permanent successor, the ESM. They are bundles of sliced up sovereign bonds, with each slice corresponding to one member-state debt (in proportion to their GDP), complete with separate interest rates and different default probabilities. In short, they are a CDO-like toxic debt instrument that contains (as we have explained here, here and here), the domino dynamic; which led to the sequential bankruptcy of several Eurozone member-states after the creation of these EFSF-bonds.
“Euro bundles are not a great leap forward to a fiscal union but they could provide an important step towards a more integrated and more resilient European monetary union.” – Peter Bofinger, “A eurozone bond need not be a freeloaders’ charter”
His proposal for a Eurobond, as an instrument of fiscally consolidating the Eurozone, was soundly rejected by the German Chancellor. Now, with an ECB paralysed in the face of a major deflationary onslaught, Professor Peter Bofinger comes up with a variant of the rejected Eurobond, which he calls ‘Euro-bundles,’ only this time as an instrument that will bolster the ECB’s monetary policy defences against deflation; and one that may offer a modicum of hope that the Eurozone can salvage a degree of integrity after four years of fragmentation.
What exactly are Mr. Bofinger’s Euro-bundles? In what follows, I sum up his scheme and then pass on the baton to George Krimpas who asks some pertinent questions of Mr. Bofinger. My own views on Euro-bundles will appear in a follow-up post shortly
For those of us who grew up under totalitarian regimes, it is noteworthy that Europeans are resorting to a time-honoured tradition: telling jokes as a form of defiance.
Here is one: “Why did Europeans agree to form the euro?” “Because,” the joke goes, “the French feared the Germans, the Irish wanted to escape Britain, the Greeks were terrified of Turkey, the Finns wanted to prove they were more European than the other Scandinavians, the Spanish wanted to become more like the French, the Italians wanted to become German, the Dutch and the Austrians had all but become German, the Belgians sought to join both Holland and France, and, finally, the Germans feared…the Germans!”
The genuinely good news is that the Germans no longer fear the Germans. Germany’s elites today are confident in their capacity to fend off authoritarianism from within their nation. They have no qualms, any longer, to speak their minds on Europe but also beyond (e.g. the German refusal to join the US in Iraq or NATO in Libya). This renewed confidence has, thankfully, not been allowed to spill over into jingoism or to foster some ambition to rule over Europe. German elites cherish being thought of as good Europeans and have no interest in ordering the rest of the Europeans around.