We need to discuss the euro

[Commodore]

You were answered. They didn't understand the problems with the euro and made the mistake of adopting it.

If they didn't understand the problems with the Euro, then the fault still lies with them for agreeing to something they didn't fully understand. Just like if you sign a contract without reading it, you are still bound to honor that contract or pay whatever cost is outlined in the contract to get out of it.

It would have been plenty rational had the EU fixed the euro the moment the flaws were discovered. I.e. it would have been rational for Greece had the EU itself acted rationally. Indeed German policy is not acting rationally. In this regard, if Greece is acting rationally on the assumption that their union partners would act rationally to everyone's mutual interests and somehow that's a fault of Greece, what basis of reasonability are you arguing from that isn't "blame the victim for annoying me"?

How exactly was Greece a victim again? Better yet, what about Greece's actions before joining the EU and during their time in the EU so far could even be vaguely considered rational?

No, Greece is about as much of a victim here as someone who racks up a bunch of credit card debt and then whines about how deep in debt they are. In other words, Greece was a victim of their own irrational and downright irresponsible fiscal policies.

Universal wealth and prosperity was a reasonable outcome if their money was half as efficient as their real economies. But their money is inefficient, with the inefficiencies hurting everyone in the long run but benefiting the top few countries' relative positions against the US (they want our dollars, their cheap euro pushes our firms to buy their stuff with our dollars).

Again, no one is forcing anyone else to participate in the Euro. If these problems are really as bad as the anti-EU crowd are making them out to be, then why don't the smaller nations leave? That is a question neither you nor anyone one else has been able to sufficiently answer. There may not be any official mechanism for leaving the EU or Eurozone, but nor is there any mechanism keeping them in either. So if Germany is taking advantage of other EU members and enacting predatory economic policies, it's because the other EU members are letting them do it. And that is why they are the ones to blame, not Germany. Remember: No one can do anything to you that you don't let them do. So if you are a victim, it's because you made yourself a victim and didn't stand up for yourself.

 

[Hygro]

No, Greece is about as much of a victim here as someone who racks up a bunch of credit card debt and then whines about how deep in debt they are. In other words, Greece was a victim of their own irrational and downright irresponsible fiscal policies.

You keep saying this, but their fiscal policies were perfectly rational and responsible, and beneficial to the EU as a whole, if the rest of the EU decided they would act economically rational and responsible in response to a financial crisis and subsequent recession.

When you let this sink in we will have a fruitful discussion.

 

[Bootstoots]

I am aware of all this, and this is what I have been trying to get the Euro-haters to finally admit (keep in mind that I don't think you are a Euro-hater). Because even if we assume the worst about the surplus countries and operate on the assumption that they deliberately deceived the periphery into joining, the fault still ultimately lies with the periphery. If a nation acts against its own economic interest just so they can be in the "rich kid" club, they can't turn around and blame the real rich kids for their poor decision making.

The main point I am making, is that it is completely ridiculous for anyone to blame Germany for any of this. Germany did not force anyone to join the EU, and you cannot reasonably expect them to take action against their own economic interest just so other nations can have a "fair shot" at economic success. Common currency does not mean everyone gets an equal share of the wealth. Just look at the United States. There are certainly some states that benefit greatly from the strength of the US Dollar and others that get the shaft economically because of it. It's the same for the Euro, some members are getting hand-over-fist rich from it, and others are getting left behind. The main difference between the US Dollar and the Euro though, is that states in the US have the US Dollar forced upon them due to the political union of the US, whereas member nations of the EU are free to abandon the Euro whenever they so choose. There's just some economic pain they would suffer by doing so. I mean, if things are really so bad for the periphery in the EU, then those nations need to just bite the bullet and leave the Eurozone. However, if they are too timid or scared to do so, then they really do need to stop complaining because at this point, they have no one to blame for their current circumstances than themselves.

I agree that Germany shouldn't be blamed for Greece's (or any other country's) decision to join the eurozone, nor for the debt that it accumulated during the bubble years. I would not even blame them (and other creditors) for attempting to get as much of their money back as possible. But their behavior goes well beyond what any rational creditor would do.

If they were behaving as a normal creditor in a situation where the debtor is insolvent, they would adjust the terms of the debt in such a way as to recover as much money as possible. This would involve some combination of stretching out the maturity of the loans, reducing the interest rates, or accepting a haircut so as to make the debt sustainable. The terms would certainly also be designed not to reduce the debtor's ability to repay. There should be conditions designed to reduce the structural problems (a bloated state sector, rampant tax evasion, etc) that resulted in the debt crisis, but not so harsh as to drive down the debtor economy even faster than it reduced the debt, as this reduces their ability to repay the debt.

But this isn't at all the way they have been behaving. In the Greek case, they are insisting on terms so draconian that the debt-to-GDP ratio will climb to over 200% in the IMF's estimate, and the IMF is historically way too optimistic in cases like this. This isn't an attempt at a solution, it's an exacerbation of the problem for the purpose of punishing Greece. Even before the referendum, their plan was just to kick the can along with small loans every few months while continuing to insist on excessively contractionary measures. This is not the behavior of a good or even just self-interested creditor.

The other PIGS were also given terms that worsened their crises, although they weren't in the same amount of trouble, so they did eventually stabilize for now. Further, Germany and other surplus countries generally seem uninterested in developing mechanisms for investing or transferring their surpluses into deficit countries. Without such a mechanism, structural trade imbalances will persist, making the union more unequal than it needs to be. If the US similarly lacked these sorts of surplus redistribution/reinvestment mechanisms, Mississippi, West Virginia, and the like would be in perpetual debt crises just like Greece, and this is a big part of why the US works while the eurozone is wracked by chronic debt problems in its periphery.

There's quite a bit of blame that I think is justified, although I do agree with you that they don't deserve blame for poorer countries' choices to join the eurozone.

 

[Commodore]

You keep saying this, but their fiscal policies were perfectly rational and responsible, and beneficial to the EU as a whole, if the rest of the EU decided they would act economically rational and responsible in response to a financial crisis and subsequent recession.

When you let this sink in we will have a fruitful discussion.

So lying about their finances both before and after joining the EU is rational fiscal policy to you? Borrowing money just to give your government workers a wage increase that wasn't sustainable was rational fiscal policy to you? Ceasing just about all tax collection during election years to get in the good graces of voters is rational fiscal policy to you? Borrowing even more money to fund an out of control and over-bloated pension system is rational fiscal policy to you?

I'm sorry Hygro, but saying Greece had sound fiscal policies prior to the crisis is just not true, no matter how much you want it to be. No matter how much you want the narrative to be that way, Greece is not some poor innocent victim and the EU is not some greedy evil empire trying to subjugate the hard-working honest Greeks.

If they were behaving as a normal creditor in a situation where the debtor is insolvent, they would adjust the terms of the debt in such a way as to recover as much money as possible. This would involve some combination of stretching out the maturity of the loans, reducing the interest rates, or accepting a haircut so as to make the debt sustainable. The terms would certainly also be designed not to reduce the debtor's ability to repay. There should be conditions designed to reduce the structural problems (a bloated state sector, rampant tax evasion, etc) that resulted in the debt crisis, but not so harsh as to drive down the debtor economy even faster than it reduced the debt, as this reduces their ability to repay the debt.

Germany has already done that for Greece multiple times though. I mean, how many times is Germany supposed to restructure the debt and adjust the terms before they get to say enough is enough? If I stop paying my mortgage, sure the bank will do whatever they can to get me paying again and recoup as much of their money as possible, but if I chronically fail to make my payments, eventually the bank is going to stop trying to work with me and they are just going to foreclose on my mortgage and evict me from my house. That's what's happening between Germany and Greece right now and I don't see how anyone can honestly say Germany is wrong for doing what they are doing.

 

[Timsup2nothin]

Germany has already done that for Greece multiple times though. I mean, how many times is Germany supposed to restructure the debt and adjust the terms before they get to say enough is enough? If I stop paying my mortgage, sure the bank will do whatever they can to get me paying again and recoup as much of their money as possible, but if I chronically fail to make my payments, eventually the bank is going to stop trying to work with me and they are just going to foreclose on my mortgage and evict me from my house. That's what's happening between Germany and Greece right now and I don't see how anyone can honestly say Germany is wrong for doing what they are doing.

Difference is that your mortgage is a secured loan. Greek debt is effectively unsecured. If Germany puts them in a position of default it is effectively game over for the creditor as there is no house to foreclose on. This is a lesson of international debt that has been learned (and forgotten) over and over and over.

 

[ori]

The Greek banks wouldn't lend to the Greek government, only the German banks were that irresponsible.

I'd like to see real numbers for that - I suspect that its a myth - the numbers here for example, paint a much different picture with much of the exposure having been to the major Greek banks: http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=5343&context=faculty_scholarship

 

[ori]

You keep saying this, but their fiscal policies were perfectly rational and responsible, and beneficial to the EU as a whole, if the rest of the EU decided they would act economically rational and responsible in response to a financial crisis and subsequent recession.

When you let this sink in we will have a fruitful discussion.

It may or may not be economically rational what the Greek government did and expected of other EU members. However mere economic rationality never ever ever played a role divorced from other factors in any decisions by any political actor. In the current crisis public perception and the idea that treaties are to adhered to or altered by mutual consent and not by covert or declaratory actions by one party played a huge role in the past and has been doing so in the past few weeks as well. By the way also a rational expectation as both disregarding the underlying legal framework governing the EU/Eurozone and disregarding the (voting) public 's perception outside Greece could have a destabilizing effect on the EU/Eurozone down the line and almost certainly would have a destabilizing effect on individual countries' governments again effecting the economies involved.

 

[FriendlyFire]

You keep saying this, but their fiscal policies were perfectly rational and responsible, and beneficial to the EU as a whole, if the rest of the EU decided they would act economically rational and responsible in response to a financial crisis and subsequent recession.

When you let this sink in we will have a fruitful discussion.

The Greeks fiscal policies were rational and responsible ?

When you spend 4 times the Finnish education system and yet have one of the lowest educations performance with Parents forced to hire private tutors.
When Public wages are 3 times to equivalent private
When Entire public department do NOT exist
When there is no public register for land
When public own companies are losing massive amounts of money and Billions and Billions in debt.
When the government spending says whatever they want it to say.
Where 10 Billion per year in Taxes are not collected


This is consider rational and responsible ?

 

[Bootstoots]

Germany has already done that for Greece multiple times though. I mean, how many times is Germany supposed to restructure the debt and adjust the terms before they get to say enough is enough? If I stop paying my mortgage, sure the bank will do whatever they can to get me paying again and recoup as much of their money as possible, but if I chronically fail to make my payments, eventually the bank is going to stop trying to work with me and they are just going to foreclose on my mortgage and evict me from my house. That's what's happening between Germany and Greece right now and I don't see how anyone can honestly say Germany is wrong for doing what they are doing.

How much the debt has to be restructured in order to be sustainable depends on how much debt there is and what kind of shape the debtor is in. Greece's debt was substantially restructured in the 2010 and 2012 bailouts, which involved a transfer of bad private debt to Eurozone taxpayers, refinanced at lower interest rates and with a longer maturity. The 2012 bailout also involved a haircut of a little under 100 billion euros from a debt of around 350 bln, in which most of the remaining private creditors took losses of up to 53.5% on the face value of their debt.

These still weren't anywhere near enough to make the debt sustainable, especially after the economy contracted dramatically in 2012-3. Despite (actually in part because of) austerity measures, debt rapidly climbed back to about 320 bln, as debt increases more or less automatically during a recession because of decreased tax revenue, increased countercyclical social spending and the like. The program ended earlier this year, and even if Syriza hadn't been elected there would certainly have still needed to be another bailout.

And as Tim said, mortgages are secured loans and so aren't really comparable to sovereign debt. This is more like a company in Chapter 11 bankruptcy, in which the debt does need to be restructured and creditors do tend to lose significant portions of the face value of their debt. You might also be able to compare it to student debt, which is unsecured and has a sovereign creditor. Someone with very high debt loads will usually take an income-based repayment plan, where payments are proportional to disposable income and the remaining balance after 25 years is written off. It makes sense for the government to offer this because the alternative is default, which is costlier for them.

 

[Bootstoots]

You keep saying this, but their fiscal policies were perfectly rational and responsible, and beneficial to the EU as a whole, if the rest of the EU decided they would act economically rational and responsible in response to a financial crisis and subsequent recession.

When you let this sink in we will have a fruitful discussion.

I think you're a bit off base here. Greece incurred very high levels of debt in a currency that it cannot issue. Even in an MMT framework, that's irresponsible. It would have been totally different if they were Japan and issued even higher levels of debt in a currency they did control, but that's not the case here.

 

[Commodore]

And as Tim said, mortgages are secured loans and so aren't really comparable to sovereign debt. This is more like a company in Chapter 11 bankruptcy, in which the debt does need to be restructured and creditors do tend to lose significant portions of the face value of their debt. You might also be able to compare it to student debt, which is unsecured and has a sovereign creditor. Someone with very high debt loads will usually take an income-based repayment plan, where payments are proportional to disposable income and the remaining balance after 25 years is written off. It makes sense for the government to offer this because the alternative is default, which is costlier for them.

My analogy wasn't intended to be a direct comparison, but was just supposed to illustrate how a creditor can eventually become fed up with its debtor and refuse to work with them anymore and just cut their losses. I'm getting the feeling that Germany is getting very close to this point with the poorer nations of the EU. This seems to be especially true with Greece since their fiscal irresponsibility almost seems willful at this point.

 

[Timsup2nothin]

My analogy wasn't intended to be a direct comparison, but was just supposed to illustrate how a creditor can eventually become fed up with its debtor and refuse to work with them anymore and just cut their losses. I'm getting the feeling that Germany is getting very close to this point with the poorer nations of the EU. This seems to be especially true with Greece since their fiscal irresponsibility almost seems willful at this point.

This is the issue, right here. Germany is playing "we will make an example of Greece", perhaps in line with what you are suggesting; that they are "getting close to this point with the poorer nations of the EU." What's missing is that while Germany may not need Greece to stand on, they need someone...and more than one someone. The top of a pyramid can't just hover.

If the rest of Europe looks at Greece and says "rather than draw lots as to who is Germany's next whipping post, how about we all just dump Germany" it is actually Germany that has the most to lose. Because saying "okay, just don't pay any more" to a debtor who owes you unsecured debt doesn't cut your losses, it locks them into existence.

 

[Agent327]

it is actually Germany that has the most to lose. Because saying "okay, just don't pay any more" to a debtor who owes you unsecured debt doesn't cut your losses, it locks them into existence.

Which would explain the debtors' (not just Germany's) unwillingness to agree to the IMF proposal of debt cancellation.

(The rest of your statements amount to little more than speculation, so I shan't comment on that.)

Ceterum censeo the euro won't be going away anytime soon. There's nothing wrong with it. There is something wrong with Greece though.

 

[Bootstoots]

My analogy wasn't intended to be a direct comparison, but was just supposed to illustrate how a creditor can eventually become fed up with its debtor and refuse to work with them anymore and just cut their losses. I'm getting the feeling that Germany is getting very close to this point with the poorer nations of the EU. This seems to be especially true with Greece since their fiscal irresponsibility almost seems willful at this point.

I see, and I can appreciate that outlook. Although I think a large debt restructuring is a better solution, default+Grexit would have been better than what occurred. The current plan is the worst of all possible worlds because it keeps Greece in their straightjacket (which they apparently don't want to leave) while completely torpedoing any basis for recovery, guaranteeing continued economic depression and an even worse debt situation a short way down the road. I blame the Germans to some extent for even offering a "deal" like this rather than just refusing and offering only to help the Greeks transition to the new drachma.

I was surprised to find out that Syriza was so unwilling to default and leave the euro that they'd accept something like this instead. I assumed by their negotiation strategy that they were open to the idea of defaulting and leaving the euro and were perfectly willing to consider that if no sustainable deal could be reached. Instead, it turned out to be the Germans who wanted that outcome, while Syriza was bluffing even though everyone knew that default was the only card it had. So the outcome was impressively stupid, even by the standards of international politics.

 

[Yeekim]

I find it funny that the defense against "the Euro only benefits Germany" is "no, it also benefits France" and that is supposed to make it all sound better to all the other countries. Every country being used by the Euro needs to wake up and ditch it.

The Euro is a Ponzi scheme. Benefits flow up the pyramid to the top (Germany, France) and misery flows down the pyramid to the bottom, where Greece has been. Countries in between get some benefits from the bottom and some misery from the top...but as the bottom crumbles the flow of benefits up stops, and the bottom where there is nothing but misery moves up.

Spain was at the bottom for a while, and Germany and France pulled them up onto someone elses backs so they could be in the middle for a while. That's what they want to do with Greece. Then they will do the same for whoever is at the bottom next. The longer they can rotate the middle and bottom positions while they stand on the top the better...for them, but not for anyone else.

This view is, unfortunately, not backed by any actual data, as I see it.
I posted a graph while ago, showing that German trade balance with rest of the EZ is roughly neutral.
Here is another good article from March:
http://slackwire.blogspot.com/2015/03/what-has-happened-to-trade-balances-in.html

In the FT last week, Martin Wolf pointed out that over the past five years, the Euro area as a whole has shifted from modest trade deficits to substantial trade surpluses, equal to 3 percent of euro-area GDP in 2013.

Still, the fact remains, trade deficits have almost been eliminated in the euro area. Liberal critics of the European establishment often say "not every country in Europe can be a net exporter" as if that were a truism. But it's not even true, not in principle and evidently not in practice. It turns out it is quite possible for every country in the euro to run a trade surplus.

 

[Borachio]

I don't have much of an idea what

Still, the fact remains, trade deficits have almost been eliminated in the euro area. Liberal critics of the European establishment often say "not every country in Europe can be a net exporter" as if that were a truism. But it's not even true, not in principle and evidently not in practice. It turns out it is quite possible for every country in the euro to run a trade surplus.

is referring to. Whether it's a quote from Martin Wolf, or whether it's satire, or not.

But it seems bizarre to maintain that every country in the entire world could run a trade surplus (if that's what the inference actually is). And the only possible way that every country in the euro could run a trade surplus is if some other country or countries, outside the euro, were running a trade deficit.

I don't see any way round this. For every debtor there has to be a creditor, somewhere in the mix.

 

[ori]

Europe is not the entire world though - its theoretically quite possible for every EU country to be a net exporter if non-EU countries do the importing...

 

[Borachio]

Indeed. But is that fair? Or even desirable? And, more importantly, is it sustainable?

 

[Wastl]

This is the issue, right here. Germany is playing "we will make an example of Greece", perhaps in line with what you are suggesting; that they are "getting close to this point with the poorer nations of the EU." What's missing is that while Germany may not need Greece to stand on, they need someone...and more than one someone. The top of a pyramid can't just hover.

If the rest of Europe looks at Greece and says "rather than draw lots as to who is Germany's next whipping post, how about we all just dump Germany" it is actually Germany that has the most to lose. Because saying "okay, just don't pay any more" to a debtor who owes you unsecured debt doesn't cut your losses, it locks them into existence.

No, it isn't. Germany isn't even the country that is the most against the new deal. Maybe you have missed it, but out of 19 countries, there were exactly three that favoured a less harsh deal than Greece got, and those countries were France, Italy and Cyprus. Quite a few of the smaller nations were much more against spending any sort of money on Greece, mostly because Greece has been an utter joke for quite some time now. They didn't do the reforms as they were supposed to, yet were still trending up slightly, until Syriza came into power that is. That party somehow managed to destroy its own country so thoroughly that it was in immediate danger of collapsing, something that wasn't anywhere close to happening prior to them being in charge. They topped this off, by lying every chance they got, saying one thing to one party and something entirely different to someone else. They did not attempt any reforms themselves, in fact, they didn't even do the things they promised they would do during their election campaign. They were unprepared every single time there was a meeting with their debtors, preferring to throw arounds insults publicly instead. They even lied to their own people prior to the referendum, suggesting that they could get a better deal (seriously?) and that they would bring a new offer on Monday after they won the referendum (yeah, I guess a dog ate it).

This act of "Germany is the only one who is angry and is bullying everyone into submission" is such an utter joke, I have no idea why anyone would even think there is any truth to it. The majority of the Euro-zone was against further help, in part due to them having made harsh reforms themselves without outside influence and without whining about it. Greece gets this "treatment", because it has proven to be completely unreliable and not being interested in changing its ways even slightly. But somehow all these nations get ignored, or an "argument" gets made that they all only do that out of fear of Germany, with not even a tiny bit of proof or even an unsubstantiated rumour that supports this idea.

Germany wanting to make an example out of Greece, ha, nonsense. If they had wanted to, they would have thrown Greece under the bus, bailing out their own banks instead, which would have been far cheaper than this dumping of money into a bottomless pit. It's truly funny how a nation that has to throw away billions and billions of its money to help another country is somehow supposed to be the bad guy. Just like it is funny that anyone complains about the debtors wanting to make sure that their money gets actually used for something useful, because apparently there have never been any demands made during the cause of someone lending money

 

[Yeekim]

Indeed. But is that fair? Or even desirable? And, more importantly, is it sustainable?

If there is to be international trade, there are going to be net exporters and net importers. Complete equilibrium where every country has a perfectly balanced trade account is obviously unrealistic.

Fortunately, these roles aren't locked into place.