Markets are pricing greek debt as defaulted because it's the most rational thing for the greeks to do, and the most rational outcome. Greece holds power over the EU to the degree that its financial insolvency can bring the whole system down. (Technically, it's a power transfer from the EU to US as the fed has already bailed out the EU banks in anticipation of the Greek default)
When you owe the bank $1 million the bank owns you, when you owe the bank $469 billion, you own the bank. The average greek is smart enough to know this and knows that the closer they get to default the better the deal they will get. The banks have two options, get nothing, or get something.
Also, if the Greeks' can't pay at a AAA rating they certainly can't pay at AA rating, nor A, not BB, so the end game for rational thinkers is default because as the rating drops the inability to pay increases. Since Greeks hold EU notes and EU denominated assets they can't even be screwed via an exchange rate mechanism. If Greece defaults Europe basically has to eat it, and it puts Europe in a much worse negotiating position with Spain and Portugal.
Furthermore, with regard to bond pricing there is no such thing as a bad bond, only a bad price, hence they are quickly being priced to zero. It's similar to the whole subprime thing, guys who bought subprime post Aug 2008 actually did alright because the prices were so low that you'd be somewhat likely to get your money back.
Inflation in Greece is currently sitting at 4.5%, so the T-bills are essentially offering a real 8.5%/year ROI. How on Earth is that affordable to them? I get that they need money now, but they can't expect to be in a better position to repay in 2 years.
Also, what happens if (when) Greece defaults? Do the T-bills become worthless, or are they considered a different kind of debt than other national debts?
How on Earth is that affordable to them? I get that they need money now, but they can't expect to be in a better position to repay in 2 years.
They aren't actually paying that. Since the EU/ECB/IMF gave them all that money they have a nest egg and don't have to go to the market and sell more bonds.
AFAIK the 26% is from secondary sales, people who bought a bond before and now, in order to sell it on, have to offer a high rate.
However if the EU/ECB/IMF money runs dry, and they need to go back to the bond market, then this is the rate they would pay. As you said, that's impossible. So if the EU/ECB/IMF money runs dry, they'll default.
Keep in mind that there is no chance in hell that a 2 year bond will actually pay that, they'll default before then, but if you really want to, get one from a primary dealer.
To retaliate against this, can't the EU threaten to kick Greece out of its system while force-converting all their EU-denominated assets into a newly setup Greek currency. (We can view this as the default of their agreement to support Greece--in response to the Greek refusal to pay off its debt.) The new currency will immediately weaken significantly, basically forcing austerity measures onto the whole economy. When the Greeks are on their own, without having EU as their sugar daddy, they will have to absorb (or receive) the direct consequences of their actions--whichever fiscal/monetary path they choose to follow.
The technical issues of force-conversion of currency their assets are denominated in are probably quite immense, but it is better than losing hundreds of billions of dollars. Moreover, if it can be done, all other troubled economies in Europe will have much greater incentives to follow any rules set up by the EU.
That would not solve the problem. Greek would still not pay they money back to the French and German banks they took it from.
The EU has to get Greece on track, and this is a good moment to do it. Greece has lied (falsified financial data) to get into the euro, and their internal economic system is not sustainable. These will be tough year for Greece but at the end they will be better off.
Can their sovereignty be weakened? As in the French and Germans slowly just taking over Greek institutions. (As in since you can't get the taxes yourself, let the Germans run the police and the tax office?).
There were snide remarks and suggestions a while back of them selling off islands? That might work.
Then I wonder how would the Greeks pay the money back anyway. How much feta-cheese and tourism can they sell? At some point the interest rates are just to high for them to even touch the principle when paying back, even if they start to double their feta cheese production and start actually diligently paying taxes ...
Nobody in France or Germany will be remotely interested in "taking over" Greece. Its like saying "hey, I got here a bucked of problems, want them?" Well, no, thanks!
The sovereignty of all European countries is "weakened", that's the whole idea of the euro. There is another level of supervision, and that is really good. Not only in Greece, also e.g. Germany constantly gets told from EU institutions or the EU supreme court to change laws and regulations or to watch the deficit, etc. That's a good thing. Of course the politicians don't like it, takes away some of their power.
Greece has vast opportunities, if they would get their stuff together. Solar power alone could be a great industry in Greece. There is a plan called "DeserTec", with several large EU corporation planing to install a hundred billion in solar cells in Northern Africa. If Greece was smart, they would jump on that train. But they are not, apparently. Its easier to borrow money and whine on payback time.
> Nobody in France or Germany will be remotely interested in "taking over" Greece. Its like saying "hey, I got here a bucked of problems, want them?" Well, no, thanks!
Well if they have islands that can be used for military bases, or agricultural lands that French farmers can use and so on. Setting a German company in charge of collecting taxes for example and making a profit. These are all draconian measures that basically are one stop short of invading the country, but I am thinking more if this is what is left as a solution. Lending them more money implies having faith that they will be able to pay it back, if that faith is gone, and they cannot be expected to pay back, the the lenders would probably like to get something else back at least, so have them sell their assets (land, control, power) ?
Half of the farm land in Europe is unused because of over production, dude. And if they wanted to use "Greek islands for farmland" (LOLOLOL) they could just buy it. That's not a matter of sovereignty. "A company in charge of collecting taxes"? Herpderp! This is not the US with private prisons and such stupidities. You are writing a real heap of nonsense here.
Lending them more money is giving them a chance to get their stuff on track. Better checks and balances. A greater awareness of civil responsibility of each individual, etc. Basically, the stuff that made Northern Europe (and the US/Canada) economically strong. Look up "Social Capital" if you are interested in development policy.
Yes, we have. Germany took over Eastern Germany just 2 decades ago and paid huge amounts of money to get the East to a more or less equal level. The result is that the old communists that had destroyed Eastern Germany, today still get over 30% of the votes by people without memory.
Its no use to help people from the outside. People must learn to run their own countries themselves.
In the case of Greece, they have to learn to not cheat to get money from Europe (like they did to get into the Euro Zone) and to pay taxes if they want that the government does stuff. Especially the wealthier people in Greece seem to be extremely selfish in that regard.
As far as I know, Germany did some nasty things while overrunning East Germany: Like, they replaced the staff of East Germany universities with West professors, throwing East professors out. Also, when choosing whether to bankrupt some East factory or refit it, they almost always chose to bankrupt (think Trabant)
And concerning "old communists that had destroyed Eastern Germany" - Eastern Germany was, like, the richest communist state. It wasn't politically free, sure, but it was fine economically.
Now, why would you expect people "without money" who did have the money (and job, and their life) before reunification, not vote for who they vote for?
They kicked communists (usually agents of the Stasi, the secret police) out of government jobs, most of those had gotten the job because they were party members. That is hardly "nasty". The other way around would have been nasty.
Would you want Gaddhafi's son to keep his military pay after the regime has been overthrown?
If you deprive reasonably successful people of their jobs (and therefore self-respect, identity and lifestyle) - surely they would be bitter and revisionistic. The fact that you-ve tossed them a bone and they aren't starving won't help much.
Disgruntling teachers and workers would not get you much popularity. People would vote for anyone who is not responsible for that. You insisting that anyone who suffered was a putrid Stasi agent would certainly make matters worse.
If two Koreas one day would unite, this would be their second severe problem after economy.
And by the way I don't understand why you assume I support the invasion of sovereign country that is Libya and installing some puppet government there. Of course I don't.
Tell that to the people who vote "wrong".
And we'll see what they'll tell you.
Of course when we see an intervention of a country, it's a total and complete responsibility of interventor to preserve any economic and industrial infrastructure.
Trabant wasn't bankrupt in East Germany.
It was bankrupt in Germany.
Who do you think is responsible for that?
Trabant went away because their product had exactly zero chance of competing in the market. A trabant was barely even a car in comparison to, say, a honda or VW. Trabants had more in common with lawnmowers, both in terms of mechanics and in terms of production conditions.
And your assumption that trabant's factories could be refitted in any way is quite a stretch. Would it really be cheaper to modernize a factory that's 30+ years out of date, rather than start over with a new building? And what would be the point anyway? Just jobs? Would not the investment be better targeted at infrastructure, mass transit, job training, etc?
I didn't say that this question has a determined answer.
What I did say: People are rightfully angry because their life was screwed by something not in their control.
It's been twenty years since the Germany reunited; Whatever problems still remaining at the former East Germany, probably aren't caused by communists anymore.
That's probably exactly what the greeks would want, except they would add one step to this: default on foreign debt. With a weaker currency they would be very competitive and with 0 debt even more so.
It's pretty risky though:
1 - the EU and others could erect trade barriers after such a default
2 - the rest of the EU could collapse with them, which means they won't be buying much stuff either
I don't think the Greeks would like to have their currency badly weakened. Any imported goods will become much more expensive and their exports will earn them much less income. Everyone, the rich, the poor, the politicians, will be affected. Basically most of them will need to be more frugal, something they are protesting against.
Also, in 2010 their import is 44.9 billion dollars twice the amount they export, 21.1 billion. Even if their exports go up because of weaker currency, the pain from higher import prices will be much worse than the rises of income in the short run.
Your consequence number 1: trade barrier is an interesting possibility, but 2: the collapse of EU is unlikely to happen given that the Greek economy is only 3% of EU, and this strong measure will have threatened other troubled economies enough they will be much less likely to default and cause more issues. The measure might in fact prevent the collapse of EU at least in the short- to medium- term.
Weak currencies have worked great for countries like China. It creates a lot of employment for export. It's a way to trick people into working at lower salaries I guess, a way to lower minimum wage yet give people the impression that it goes up (inflation has a similar effect).
More jobs has a strong political effect too; people will probably tolerate more austerity if it's not combined with unemployment.
The article explains pretty well in my opinion why that 3% is very capable of collapsing the rest of the EU. If Greece defaults, investors lose their money. That's not too bad (although there could be a domino effect with banks), however investors will also start worrying more about a default of Ireland and Portugal, followed by Spain and Italy. Such worry translates to higher interest rates leading to the horror scenario of Spain needing a bailout (which noone can afford to give them).
Anything that amounts to Greece not repaying their debts, will be considered a default by the market, likely leading to what I described in the above paragraph.
Greece, for all its issues, is a much richer country than China w.r.t its population, you cannot compare those countries. For greece, devaluation would mean that imports would become much more expensive, a state almost unable to borrow any money, etc... It would be even worse than it is now. China does not need to borrow much money on foreign markets, and it is not democratic (the Chinese gvt would never tolerate the strikes in Greece, most likely would have sent the army).
Default is the only realistic option, but Germany and France refuse it for political reasons. The other reason is that a lot of Greek debt is owned by banks from those countries: selling banks bail-out in France or Germany is not that much more popular than in the US nowadays.
Germany is also doing well with a devalued currency. If Germany still had the Mark, instead of the Euro (which is being devalued by all these crisies) it would be higher than the Swiss Franc right now.
By which measure is Germany doing well ? Its gdp increase has been anemic for years, and is for example not significantly different from France, which is rarely given as an example of growth rate those days: http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_... (the numbers stop around 2009 unfortunately, but the effectively devaluation policy of Germany started with Schroeder coming in power long before the crisis).
What is true is that Germany has put in place a devaluation strategy (by reducing wages instead of devaluating its money), but this has been a catastrophy for Europe as a whole. "Real" gdp growth comes from increase of productivity: devaluation helps hiding this for some time, but not that long.
It's only a good sign if the government is not a big employer (directly or indirectly though subsidies, trade barriers, etc). I don't know enough about the German economy to know if that's the case here.
There's no mechanism, so it would probably need some sort of vote. This would take too long, and the plan would probably leak, so the Greeks would have time to cash out all their EU assets.
If the EU coordinates with the US, Japan, and all larger economies (perhaps via IMF), couldn't they still force Greek out of any currency their assets are cashed out into? The incentives of other countries to go along is the prevention of contagion economic depression.
Of course, Greece could still convert them into a currency not controlled by this coalition (Zimbabwean dollar? ;-)), but small currencies in this role cannot support Greek economic downfall and will be significantly affected by Greek economic results. This will still accomplish the goal of getting Greece to take responsibility for their economic decisions. (If the only choices are smaller currencies, Greece will probably choose to set up their own currency instead.)
If Greece could go out of the euro without a spillover effect, i would support it. Unfortunately, the decision is to keep greece in a zombie state, barely paying its debt for 2 more years. I don't even think there's a plan after that.
If Greece defaults, it will go down the drain badly. They will not get out of this as good as Argentina did. With no significant exports (that the EU doesn't pay for with subsidies) and living from subsidies and dept over the years, there is no chance for progress. With real riots in Greece, Spain and Portugal will think twice. This will get Spain and Portugal get their job done, not giving Greece more money.
That said, the best would be to inject more money beside the debt into Greece to start some recovery. Given, Greece did cheat on the EU in the past concerning EU money, nevertheless this should get out Greece faster.
Every time I bring this up I get down-voted, but I cannot resist.
No one argues that the Greek economy was in good shape. It clearly had severe problems with corruption and inefficiencies, which were brutally exposed when the global financial crisis hit. Everyone suffered, but because of the problems in the fundamentals of the economy, Greece suffered disproportionately more. However, the European Central Bank lent the "bailout" money demanding cuts to public spending that, in the current economic situation, would have very likely worsened the Greek economic situation. Greeks realized this and protested, but were (understandably) dismissed as spoiled brats, demanding an unsustainable, comfortable lifestyle.
Now that the likely, predictable outcome is looking even more likely (namely, default), journalists are still omitting that crucial part of the analysis. Many economists warned that in a crisis of demand, which is what we're experiencing now, cutting government spending is a bad idea. In a situation of such great uncertainty in the market, the government is the only source of demand big enough to make a dent. It must, of course, borrow the money and therefore increase its deficit by doing so, but that's a worthwhile thing to do when the alternative is default. After the economy has stabilized, the deficit problem can be overcome by growth. Moreover, even if deficit reduction is your priority, if the economy is shrinking you're always going to be fighting a losing battle no matter how many spending cuts you make.
To summarize my point, the Greek economic turmoils are less of a cautionary tale of the perils of uncontrolled spending (although they clearly are also that), and more an illustration of the negative effect the austerity measures recommended by the ECB are having on the economies they are imposed on. It should give leading European nations pause when considering what to do with the rest of the troubled economies in the eurozone.
I think the element you are missing is that the Greek government spending is very inefficient; they're not investing in some kind of economy-growing infrastructure revolution, they're spending money on totally unreasonable union contracts and extraordinarily early retirement for large classes of pensioners. The cuts they agreed to are something like 78 billion euros over more than 10 years, which is quite moderate, for all the screaming. The European central banks are lending money to Greece well below market rates, and they're quite within their rights to demand a reasonable budget which might actually result in this money being repaid.
If Greece wants to increase government spending on infrastructure and investments, they can do that after getting their budget in order and convincing their own population to part with some money for the sake of these programs.
P.S. I don't think downvoting/upvoting should be a poll on whether someone agrees with a message; it's a decision of interesting/unhelpful.
I think I openly admitted that the way the Greek government was spending money was terrible. Yes, I agree with you. The Greek economy was a joke and it definitely needs to change, but let's talk about the situation as of the initial collapse.
The fact was (and remains now) that they need(ed) money just to keep afloat. The CEB could have put any provision it wanted on the money lent. They chose to force the Greeks to cut spending. My argument, informed by what I've read on the topic, would be that it would have been better for them to force the Greeks to spend the money as a stimulus, making the sort of investments that you talk about. Instead, the CEB likely worsened an already pretty dire situation.
I think you'll agree that the interesting part of this argument isn't Greece at all, but the case study Greece is becoming. It's clear more austerity measures are coming in more European countries and the US. I think it's a bad idea and I'm curious to find out what this community thinks.
Suppose you have a friend who screws up and gets fired from menial jobs, spends his money on booze and gambling, and ends up in heavy debt. Now you want to help him out, so you can do one of two things:
1. I'll lend you the money if you get a steady minimum wage job and cut off the spending.
2. Look, I believe in you. I'll lend you a whole bunch of money so that you can go to college, retrain, get a much better job, and then repay me with plenty left over for yourself.
Now I understand that (2.) sounds much better than (1.), but it's just not realistic. He will waste the money again, because he knows he didn't earn it. You have to be tough and force him to get his house in order. Then he can save and borrow to retrain. If Greece is spending its own money on infrastructure and investments, there is at least a chance it will be spent well. If it's spending other people's money - no chance at all.
EDIT: I didn't mean this to sound like I am calling Greeks in general wastrels and boozers. It's more about how other people's money tends to get spent. See the message below.
It would take too much work to transform your hypothesis into something analogous to what's happening with Greece, so I'll just point out the major leak in the abstraction.
In your example my friend and I are two economically independent entities. Yes, I care about him on an emotional level, but not lending him money will not affect my income. This isn't so when you talk about Greece and the EU. Also, as any developed economy, Greece has a large economic capacity - it has advanced industry, technology, tourism, education, etc. In short, it has a lot of assets, so lending money to it would be more like lending money to my gambling friend who just happens to be an immortal Stu Ungar - yes, he's wildly dysfunctional, but the potential ROI is almost always worth it.
OK, and I think I was exaggerating and being unfair to the Greeks - they are not gambling drunks, although I am annoyed at many of them throwing a tantrum because they have to repay money that was spent by their government in their country, and not in some foreign adventure.
The main point I was trying to make, though, is that other people's money doesn't get spent efficiently. I've been involved in some EU-financed programs, and the productivity of those compared to private sector or even regular government contracts is in the pits. Taxpayer money doesn't always get spent efficiently, either, but at least there is some kind of accountability of the government to the citizens. The idea that Greece would take money that comes from other countries, and spend it on these really great stimulus programs, doesn't pass the skepticism barrier for me.
I wildly disagree with the way my country is borrowing and spending money. Do I not get to complain about that because the money is being spent by my government in my country?
Few people even understand the issues associated with economics at that level, much less what is right or wrong. It is also pretty safe that, around the world, nobody cares until it affects their wallets directly, which is when e Greeks started complaining.
Expecting decades of mismanagement to get sucked up overnight and not have anybody complain probably isn't reasonable.
Point taken. I agree that there is a lot of waste of EU funds. I could tell you stories about my native Bulgaria that would surely make you very angry.
I still think this is a separate problem. I think right now it would be more efficient to stimulate the Greek economy than it would be to just bail it out with austerity provisions. The analogy would be to finance your friend to go to school for a year or two and earn a degree to get a better job and pay you back - he wins (gets money in both the short and long-term) and you win (get your money back and a functional friend).
the Bulgarian state nearly went bankrupt in 78 as a result of stupid state-planned 'investment'. The debts which were repaid with the strategic gold reserve which were basically the savings tucked away for about a hundred years.
The Communist government continued to spend unsustainably in IT (it was unsustainable because it was based on non-marked agreements with COMECON countries) and other sectors. Salaries were raised, people bought more Lada cars, times were good.. for a while. The USSR which gave us petrol to resell collapsed and we were unable to find markets for our goods (which apart from weapons were greatly inferior on the open market).
So we had to pay back the debts with even crueler austerity measures. But it wasn't the worst thing. The economy was unproductive. The living levels collapsed in and they reached 89 levels again in 03. Oh and 1 million mostly young Bulgarians left the country.
So instead of getting its act together the government just ignored the problems, made things comfortable for the populace and even worse problems came.
Had the Communists liberalized the economy and be sure to pay debts in the 80s it wouldn't happen.
But we didn't learn the lessons of fiscal responsibility. The Socialist government of Jean Videnov undid the austerity measures and got into an even huger mess (never mind that enterprises continued to fail). Yes, he also yet huge money printing to begin which, the Greeks don't have to deal with, so we can leave this out.
Our governments have more or less learned their lesson, even the former Communist, but the temptation is huge.
The Greeks don't have such recent history and if they don't restructure only a much bigger mess will come.
What if you've been lending the money to him that he's spent on booze and gambling? And what if you're very well paid to make good decisions about lending money?
Shouldn't you then be forced to take a very serious, if not complete, loss on the money you lent to him? It's your own fault you lent it to a wastrel. Why should you be bailed out, exactly?
Exactly. I will put a little more PF (political fiction) to make it a little bit more interesting:
How about if your "friend" is a drinker and gambler, but happens to have a big fortune, say islands, nature, ancient temples. So you find his girlfriend and start lending her drinking money out of your heart's "goodness" without managing your loan when it is small, just let it grow... Of course your friend gets drinking money and thanks his lucky stars and all his friends for lending him just to have the pleasure of his charm.... Of course you politely ask him to spend half of that money to buy submarines and fighter aircrafts from your shop. Then one day you go and tell him, "you know your debt is so big, me and everybody else were so surprised by the size of your debt, and really you have been only drinking and womanizing, haven't you... So we decided we will not lend you anymore. From now on you are not allowed to drink, but neither to eat, unless of course you sell to us your telecommunication industry at the amount of the next round of drinks, so what do you say?"
It works like a charm, your friend starts getting depressed, and gives in...
But then maybe he says, "Look I am grateful for all these drinks and all but you can't in your good sense expect me to sell my property so cheaply just because you were giving gifts to my girlfriend right. I will stop drinking, please stop giving gifts to my girlfriend and wait for a while I will give them back to you. Also I noticed you borrow money for 1% and you lend it to me for 5.2%, that is too much for "friends" isn't it, please be a sport and let me repay it to you with 1.5%."
What then?
[EDIT] Disclaimer, I am Greek, I have no illusions about the management abilities of my country (sometimes I think we are born without the part of brain responsible for financial planning ;-), but I have strong opinions about the economy of debt, the way it is manipulated by the "market" and it's implications on the life of people. My opinion is biased, of course.
No market "manipulated" Greek dept. The Greek government took more money than they could pay back and mostly spend it on creating fake jobs in the government. The submarine deal is only 1 billion euros, this is not the reason for the hundred of billions of dept. To my knowledge this has not been payed yet. The F-16 deal is 1,5 billion euros, also not the reason for the billions of dept. Especially not"half the money."
It's plain simple, the Greek people voted for a government that took more money than they could pay back and lived great with this. I know it's easier to explain the Greek guilt away in this than face reality.
Thanks for the reply. To be honest I am not sure about the exact amounts that went to weapons(, nor "Siemens", nor the companies participating in the "Olympic miracle") but I am sure, like you say that they only account for only one part of the debt.
I also do not have the slightest intend to justify or excuse us one bit, we get what we deserve. At the very end, people are responsible for what their governments do, if they are not, they do not deserve to be called citizens and nobody will ever treat them as such.
On the other hand, I see debt used as a way to extort resources all around the world, and they look strikingly similar. Look what happened in Brazil, in Argentine, in Hungary, in Turkey, in Indonesia...
For sure there are reckless governments, but I believe there are institutions that capitalize on their recklessness.
You make a good point, and if it wasn't for the panic that's been gripping everyone for the last 3 years any time there is any kind of talk of bad debt, I'd say "stand back and let whoever lent money to them do due diligence next time." Get it over with, get the bad paper out of the system. It's not enough money to cause collapse, it's a small fraction of, say, the US housing crisis. The problem is that the panics in the market make this into a very expensive proposition.
Ok, but what doesn't work? It seems kind of reasonable to use such analogies. Most people would understand how transactions work between themselves and others, just from experience, but view of us here were in government, in position to borrows, spend and repay back from another government.
It seems that basic things like "you need to pay back money we lent you" are still the same? Sure details are different, well, I don't know how different, that is why I am asking ...
A household is an open system. It is possible for a household to increase its net revenue without incurring costs. For example, if I get a new job with higher pay, the amount of money in my household has increased.
Countries (even countries in economically integrated Europe) are closed systems. Increasing the revenue to one sector results in losses to another. In this case, the Greek government can increase its revenue by increasing enforcement and raising the tax rate. However, that results in a cost to the private sector. People paying more in taxes have less to spend on other things, which lower economic activity and lengthens the recession.
As an aside, this is why I get very irritated when politicians use household/business analogies to model national economies. The two are different in kind, not just in size, and trying to compare an open system to a closed system leads to serious errors of judgement.
I don't think countries are closed systems, since they interact with the rest of the world. Countries can increase revenues without increasing costs. Suppose a country figures out how to get fusion to work: decreases electricity cost, increases revenues from sales of fusion plants. Or they talk to other countries about how to grow more/better crops; assuming they weren't at 1st world yields, there are many things that are cheap to implement that produce more money.
But isn't this a problem exactly because countries are not closed systems. They trade, borrow and lend money to each other. There is an interest rate involved. That seems like an typical debtor-creditor relationship that one might have with someone.
Greece has huge international debts due now. If these new loans were used as a stimulus instead of debt repayment they would default now and escalate the crisis the lenders are trying to contain.
If you managed your house well in the good times then large deficit spending is an option in the bad times. However if you end the good times with debt at 100%+ of GDP you have no options.
The first sentence could either be parsed two ways which yield opposite meanings or is grammatically incorrect. I can't decide which, but in any case you have a point. The first sentence was supposed to mean that the Greek economy was in bad shape and everyone knew.
FYI, almost all of this new loan is going straight to bondholders, there will be very little spending. And no, it's not enough to prevent a default or some other kind of "restructuring", "reprofiling", you-name-it.
Well, at least after they default, they get the thing they've been trying so hard to reach: a balanced budget. For the simple reason that nobody will lend them a cent any longer. "There, fixed that for you guys."
That may not be true if the default is done carefully with assistance from the EU. Greece could borrow from some special institution or the EU for some years (as it does now). The exit from the euro, though, would help to restart the economy faster and less painfully.
Really? You are from Greece, and you're serious about this? I didn't expect that this would be a serious alternative. OK, suppose that government debt gets defaulted as Greece leaves the Euro. What about private external debt, which I think is also pretty significant? Will businesses struggle to pay this in a strong currency as their own currency depreciates, or does the private sector default, too? I just thinks this sounds like almost a pure loss.
Businesses will be called to pay in either case, either through higher taxes and emergency taxation (as is now), or through a devalued currency. Besides, private debt is actually low in greece.
So isn't this just rescuing European and US investors that invested in Greece and nor really doing anything to help or increase the likely-hood of Greece paying back their debts.
> In a situation of such great uncertainty in the market, the government is the only source of demand big enough to make a dent. It must, of course, borrow the money and therefore increase its deficit by doing so, but that's a worthwhile thing to do when the alternative is default.
So I don't totally understand what you're saying, but I think it's that they need to borrow a bunch more money, spend it to grow their economy, and then pay off their debt once their economy is doing better.
The problem with that is that their finances are already terrible and no one really believes that they can pay back their debt. They're already paying very high rates on their new debt. If they tried to borrow even more, those rates would have to go even higher. So somehow they'll have to borrow enough that they can spend a lot to grow their economy and pay all the debt that's coming due, and then quickly recoup all the money they invested in their economy as even more debt comes due.
So I guess you're arguing that the ECB should give them the cheap loans without them trying to balance their budget in the short term, and trusting that in the long term their economy will grow and they'll pay it back. The ECB doesn't seem to think that would be effective, and a lot of countries are not too happy about the bailouts even with austerity provisions.
You're right about what I'm arguing and you're right in your analysis.
I think the political situation is very unfortunate and that the large European economies which effectively control the ECB are screwing up. Partly I think the problem is that the media analysis has ignored the possibility the austerity measures could be the cause the complications. The facts of this article at least seem to lend credence to the "stimulus hypothesis" and to take credibility away from austerity. It is the media's job to point that out in order to inform public opinion so that the political problems you mentioned are overcome.
There's an Australian economist called "Steve Keen", who uses mathematics (stuff like dynamic PDEs, not the crap econometricians use) to model this kind of stuff.
I think he tends to agree with Keynes, in broad terms - austerity measures are a crock, because they come at a time when the government would otherwise be the only bastion of stability. But we didn't think about this when we subjected African (and other third world) economies to the IMF's demands.
What is needed is long-term measures. Gradually raising the pension age, gradually cutting pensions, freezing spending, and so on.
Also, government reform (i.e. better transparency, whistle-blower protection, ombudsmen and auditors) is needed, not just "cutting costs".
Long term measures are impossible in government. You cannot bind the actions of future legislators. Legislators will agree to austerity measures which harm the constituents of future legislators, and then future legislators will undo it.
The only reliable way of binding the actions of future legislators is to create a politically powerful class of dependents (e.g. old people, government unions) who will fight to protect their cash cow. Unfortunately, that's what got Greece into this mess to begin with.
There's an Australian economist called "Steve Keen", who uses mathematics (stuff like dynamic PDEs, not the crap econometricians use) to model this kind of stuff.
It is probably worth noting that he's been predicting the Australian Property Bubble to pop any time for quite a while.
He already had to walk to Mt. Kosciuszko (highest mountain in Australia, like 2000m or so) because he had lost a bet on a housing prices to another economist, but all his predictions still point out that house price bubble pops any day (I'm subscribed to his blog and I admire the way he uses mathematics btw).
Is the situation dramatically different in the EU than in the US?
Here in the US, we are not suffering from a crisis of demand at all. We are suffering from structural unemployment - demand and production have both recovered, but people remain unemployed.
Your thesis is surprising, so I'll have to look more into your data.
For now I will say that (1) because of the tight correlation between employment and demand, you'd need a very solid argument that demand has recovered but employment hasn't and why and (2) the data you have in your comment doesn't show that conclusively. The only measure of demand you site is Manufacturer's New Orders, which does show an increase. However, most of it is due to airplanes, which are volatile by nature (and is partly fueled by public defense spending). Also, the best predictor of future growth in that category (Core capital goods), while growing, isn't back to 2007 levels yet. [1]
I think it's too early to say demand is back, and it's lack also explains unemployment well.
...because of the tight correlation between employment and demand...
This "tight correlation" is a conclusion of Keynesian economics, and is strongly dependent on an assumed correlation between production and employment.
The logic goes: production and employment are highly correlated (i.e., you can't increase production much without increasing employment). Weak AD reduces production, therefore stimulating AD can increase production and employment.
As my data shows, the correlation between production and employment is quite weak, and we can therefore not use employment as a proxy for demand.
I don't think what you are saying is the full story - demand hasn't recovered completely. For example, I believe real estate demand is very low (and real estate sales has major flow on effects)[1].
If you believe in Keynesian economics, it doesn't matter that real estate hasn't recovered. The only quantity that matters is aggregate demand and aggregate supply. (Employment should be slaved to AS.) Taking the Keynesian assumption that AD and production are monotonically related to each other, we can conclude that AD has recovered.
If you push theories in which you you treat real estate separately from the rest of the economy (i.e., you assume construction workers don't immediately go out and become nurses), you are a structuralist rather than a Keynesian.
In any case, the Keynesian assumption that employment increases with production is simply not true of the modern economy. This is quite easy to establish empirically - just compare graphs of production to graphs of employment.
By the way, here is more data on employment across the economy.
Taking the Keynesian assumption that AD and production are monotonically related to each other, we can conclude that AD has recovered.
I think most Keynesian have moved on from that simplistic view. Stagflation in the 1970s showed that the inflation/unemployment relationship could move, and few would argue against structural change having a similar effect.
In any case, the Keynesian assumption that employment increases with production is simply not true of the modern economy.
That's an effect, not a cause. Traditionally it has happened like that, but anyone who argued it had to be that way would be stupid.
I think we are strongly agreeing about the importance of structural change? (And hence I agree with you about the lack of a strong relationship between production and employment). I don't agree with you that demand has recovered though. Your data (http://research.stlouisfed.org/fred2/series/DGORDER) shows it still at levels around that in 2004/05.
You shouldn't look to real estate to evaluate demand. The housing bubble is the primary cause of the crisis. By most estimates prices have to dip another 10% in order for the market to return to its historical trend (which is to grow at the rate of inflation). There is no demand now because everyone knows housing is overpriced. That's a good thing.
We've resumed normal growth, but we haven't had any of the faster than normal catch-up growth that usually happens at the end of a depression and returns unemployment to normal. So by that measure the current high unemployment is to be expected.
But how was the government to avoid cutting spending? Even if we include the recent austerity measures and ignore the interest payments on the debt Greece is still spending more money than its taking in. Greece can't keep borrowing money from the market if the market doesn't think Greece'll be able to pay its loans back. Greece can't just borrow money from Germany with no string attached because German voters want Greek austerity. Greece cant' default without more austerity to bring its expenses under its income, like Argentina successfully did. And it can't just inflate away its debt because its part of the Euro. Austerity does really suck in bad economic times and its probably worse than inflation, but Greece doesn't have any other options.
Every time I bring this up I get down-voted, but...
Every time someone begins a comment or blog post with text that says absolutely nothing about what they are trying to say, they weaken their point. If you cannot resist including meta-commentary, I suggest putting it after your rhetoric, like this:
p.s. I apologize for meta-commentary, obviously this has nothing to do with the Greek Economy.
The current crisis was not a problem caused by the global economic downturn, in fact the drops in tourism were no more than 10% and shipping, well, eventhough it was hit during the recession, but shipping accounts for only 4.5% of our GDP. It had little to do with the global economic crisis because a) greek banks were not exposed to failed institutions and b) greece does not export much anyway.
The problem with the economy of Greece is that it is not diversified, it was heavily de-industrialized in the 90s, with rampant corruption, protectionism and an third-world-level tax collection policies. The governments are mainly at fault for these excesses. As things proved out to be, the growth rates of the 00s (the largest in EU) were fake, based on lending that was not reported (and, guess what, nobody has yet gone to jail for that). The current crisis emerged because they were no longer able to hide the fact that the country is insolvent.
At the current point, I think it's too late to save the Greek economy anyway. The best options we have are either a) the EU guarantees a large part of our debt (like 50% or so, via something like eurobonds that basically amounts to a bailout) or b) we default and leave the eurozone to rebuild the economy from the start.
It's silly to say it had little to do with the global economic crisis. Economic production following the initial global downturn went down 8% [1], construction 73% [2], and retail 9% [3].
What's interesting to me is why you think what you think about the Greek economy or the reasons for its collapse? (A sincere question)
The data you point to are for 2010, when greece entered the EU/IMF mechanism and govt spending stopped. This does not have to do with the global economic recession that started in 2008.
I am Greek, and know that Greek banks were very little exposed to the international toxic assets. None of them collapsed, in fact they chose not to take govt-offered support money they were offered (28 bil. euro or so) in 2008. There are structural problems here, and although measures are being taken to rationalize the market, it's gonna take years to see the results.
To your first point - point taken. A better reference would have been the fact that the World Economic Outlook Database reported Greece had entered a recession in 2009.
I'm Bulgarian and none of the Bulgarian banks had any problems, but the Bulgarian economy has definitely suffered, for the same reasons as Greece. Both are relatively small European economies, so any dip in the European market has a pronounced effect (easiest to see in tourism). So, you're not proving anything by saying your banks had no problems.
I 'm saying that the crisis would have emerged even if there was no global recession. It's a solvency crisis caused by rampant government lending for more than 15 years before 2010.
The Eurozone could go belly up because of a cascading failure. The US may default because conservative politicians think it is "not that big of a deal." China is scared of an economic slowdown and inflation. And everyone thinks we're in a bubble and we're about to hit a point of irrational exuberance.
If you haven't already, I'd suggest reading This Time is Different. It turns out that our current situation isn't unique, and is in fact a pretty vanilla financial crisis. The elements are the same: large deficits that artificially prop up the economy causing a bubble, sovereign debt defaults, loss of investor confidence caused by political division (think it was a coincidence things came to a head during the 2008 election?), and bank runs. Sad how we always forget 800 years of financial history.
You have to be careful with your analysis. In particular when you're talking about large deficits, you should not confuse private actors and government.
In the run-up to the crisis, the economy was largely fuelled by private debt. Think excessive credit card debts and, more importantly, insanely lax mortgage requirements.
What we have been witnessing is a shift of this debt away from the private sector (which cannot sustain an unlimited amount of debt) to the government sector (which, at least in the case of a sovereign government like the US, can sustain an unlimited amount of debt because it's the entity running the system).
The distinction between private and government debt is crucial, because government debt equals private assets.
To be simplistic, it seems that things are quite different this time. The fundamentals of crises may be the same or similar, but the world has -never- been linked in the way it currently is, and the world population, and total consumption has -never- been as high as it currently is.
I hate to argue against an entire book with a sentence like that, but claiming that this is a "pretty vanilla financial crisis" seems to take the overall situation in a dismissive light that I don't agree with.
I think you and the book agree. The title "This Time is Different" is a reference to how economists tend to see the same signs that always indicate a financial crisis and say "This time is different".
When I said that this is a vanilla financial crisis, I meant that the things the grandparent post mentions aren't necessarily unique, albeit more widespread than normal. In fact, it's surprising how frequently you see the same patterns appearing.
One important point in this book (p. 32 in my PDF): Greece has been in default or reschedule of its debt in 50.6% of the years since its independence in 1829. More frightening, Spain hasn't fared much better overall in the past 3 centuries.
The reason for this big imbalance is the focus of the German industry on exporting goods.
Every time the Euro is lowered the German exports are heavily increasing what makes the problem even worse.
Different countries with the same currency was a stupid idea to begin with.
Please explain why it is rational for Athens and Berlin to not share the same currency, but is rational for NYC and LA to share the same currency. NYC and LA are MUCH further apart than Berlin and Athens. I fear your view of the modern economy is rather mercantilist and zero-sum rather than the capitalist view that the economy grows via increases in productivity. (Personally, I feel we are moving away from the productivity view towards an attention based economy)
Most of the arguments in regard to national economies make little sense in smaller geographic contexts, there is little worry that NYC is 'stealing' jobs from Wichita because of the various subsidies in NYC compared to the idea that China is 'stealing' jobs from the US. No one worries about the trade imbalance between Iowa and Alaska.
Why are we not worried about cheap Kentucky labour spilling into San Francisco? Most of the arguments made with regard to trade policies and imbalances are irrational, especially in light of the reserve currency status of the US dollar.
"Please explain why it is rational for Athens and Berlin to not share the same currency, but is rational for NYC and LA to share the same currency."
The problem is that you cannot have monetary union without political union.
EU rules notwithstanding, Germany and Greece are run by different governments, with different laws, constituencies, and operational capabilities (or lack thereof, in Greece's case).
As far as I know different states in USA have different laws (e.g. in Philadelphia you can't buy single bottle of beer in supermarket). Different states have different taxes. Some laws are nation wide but that's the same in Europe. If country does not put laws into its law base it should pay penalties (and you don't even have to be member of euro-zone for that). The only real difference between USA and EU is language however even that is not big problem (e.g. my country lost about 18% of population because of emigration to richer EU countries).
You are missing the elephant in the room. The US federal government spending accounts for around 20% of the GDP. A large portion of the automatic stabilisers including social systems (as limited as they are in the US) is shouldered by the federal government.
This is a huge stabilising momentum for the economy, because the government does not have to (and indeed it should not) reduce its spending due to financial pressures. There are no financial limitations to how much money the US federal government can spend.
(There are other considerations - in real terms, i.e. real capacity of the economy - that put a limit on how much spending would be wise, but since utilisation drops in an economic crisis, the room for additional non-inflationary government spending actually increases.)
None of this exists in the Eurozone. All spending within the Eurozone is done by actors that are financially constrained, and therefore there is much less momentum to carry on stability in case of a crisis.
Your answer is really good. Therefore I have dig a little bit deeper.
"As of September 2004 the U.S. Congressional Budget Office reported that federal government spending for 2004 was projected to be $2.293 trillion, or slightly less than 20% of the GDP. Of that, $159 billion was for net interest, $486 billion for defense, $492 billion for Social Security, $473 billion for Medicare and Medicaid, $191 billion for various welfare programs, $136 billion for "retirement and disability" benefits, and $64 billion was projected to be spent elsewhere." (from http://en.wikipedia.org/wiki/Government_spending)
Therefore your numbers are correct. It is big work to find numbers for the same year but for example military spending between EU and USA can be compared:
"The combined defence budgets of the 27 EU member states in 2008 amounted to €284.9 billion ($406,7 billion). This represents 1.63% of European Union GDP[2], second only to the US military's €477.4 billion ($620.5 billion) 2008 defence budget, which represents 4.5% of United States GDP." (http://en.wikipedia.org/wiki/Military_of_the_European_Union)
In this case we still have different agents but military spending has indirect economic effect on different EU countries (e.g. military airports in countries that do not even have its own war air planes).
Still your argument is really strong having in mind social security of federal budget's spending. Europe Union has its own budget as well but it is way smaller compared to US federal budget (about 1-2% of EU GDP vs 20% of USA).
Finally it is not very good to mix EU and Euro zone (because not all EU members have Euro).
New York and LA share a single central bank and a single set of federal law that is equally valid in both cities. Berlin and Athens have neither of these advantages. The Euro zone - while cool - is probably not quite cool enough to survive (my layman's perspective).
> mobility between EU countries is a piece of cake.
The whole "different language" thing stands in the way of this. Plus, the Okies never had to deal with Californian "nationalism" in the 1930s, while, on the other hand, if you're Polish, Romanian or Bulgarian and you've gone to Western Europe in search of a better job you're always looked at as a foreigner, a guy who "has come to steal our jobs and destroy our identity".
In some professions (especially construction), the workforce is already mobile inside EU. In most others, it isn't. And this is mostly due to language issues.
The EU, unlike the USA, is much less centrally controlled, and has much less tax raising powers. In fact, it has none. We have 'european taxes' or 'federal taxes' here in EU.
So one country can do crazy things with it's finances, and the other countries can't really stop it.
Your questions were all asked and answered by America's founders, hundreds of years ago. The EU is nothing like the US -- it's more like a collection of barely unified city-states bound more by treaties than a shared constitution.
The reason the Greek crisis may be more important than the introduction of the Euro is precisely because it may mean the downfall of the Euro, at least in some commentators' opinions. I don't personally have any insight into what might happen if/when Greece defaults.
Your summation of the EU actually sounds a lot like what the US started out as, save their constitution appears in multiple treaties. Almost all the properties that we think of a constitution as having are present in the EU treaties.
The founders certainly never envisioned a single unified fiat currency, in fact they were pretty much of the opposite view:
Section. 10.No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
The founders mostly envisioned that the unifying currency would be gold and silver, it's understandable that the court would let early USD stand as it was effectively gold, however post 1933 (gold becomes illegal) / 1973 (US withdraws from Bretton Woods) it's difficult to make the argument that USD complies with the constitution, or any state law recognizing USD as payment of debt.
The constitution would only allow enforcement of the USD at the interstate commerce level but at this point interstate commerce means pretty much anything the Federal gov't wants to regulate that wasn't explicitly granted in the constitution.
Think of it this way, all forms of social media are basically measuring attention. Pageviews, average visit, etc. Facebook is worth $70 billion because it can monopolize 15 minutes of the average users' attention per day. When people say that Win Phone 7 is doomed the underlying assumption is that developers will not give it attention and consumers will not give it attention because developers have not.
"When people say that Win Phone 7 is doomed the underlying assumption is that developers will not give it attention and consumers will not give it attention because developers have not"
Well... if this is a representative illustration of that "attention-based economy" idea, then I'd argue we've already had that for centuries now.
I assumed something along the lines of "being able to pay for my groceries simply by trading in some of my attention"... such as watching ads or simply spending my valuable time in the store -- both of which I arguably already do, except I still pay cash too.
How Coase relates to the social media "attention economy" idea on the above Wikipedia page: "This article needs attention from an expert on the subject."
Different economies with the same currency is a stupid idea. The problem in the eurozone is that some economies cooperate well (germany and france) , and some dont. Also, the euro has been strengthening vs the USD and GBP during the crisis, but still german exports were booming.
Some people have jokingly suggested that Greece should just sell a few islands. I'm just curious how much they'd have to sell to make e.g. $100 billion.
I think it would be kind of cool (and historically ironic) if they sold some land to China and let them build a few descent city-states in the area in the next year or so. A couple of million extra people should prop-up the Greek and EU economy.
more succinct, yes, but it imparts the reader with much less background information, which makes it much less useful to anyone who is not already informed about the situation.
In my opinion the EU needs to trace the contagion effect and limit its effects.
It can do this by offering to take over all credit default swaps on Greece's bonds, no sane economic actor is going to refuse that when a default is imminent.
What happens then is that the ECB absorbs all losses from a Greece default, blowing a large hole in its balance sheet.
However the ECB can just print itself back into solvency.
What does Greece 'do'? I can tell you what France exports/makes, Germany, Netherlands, Italy, even Portugal, but Greece; do they actually do anything? Is anything created there? Do the Greek actually work? I've been on vacation there a few times, and i've never seen people so lazy; we went into restaurants and actually had to literally kick the waiters to serve us; they were annoyed that customers came in.
When I read the first half of your post I first had to laugh because I thought it was ridiculously insulting and simplifying. However, reading the part about the waiter, I quickly realized that I made the exact same experiences on my Corfu vacation years ago. The best thing was this: Our hotel had free coffe till 4pm. We ordered coffee at 3:59 or something like that. The waitress starts making coffee, but stops all the sudden. Sais "it's 4pm, no more coffee" and pures the coffee powder back into the container. We were just speechless.
I feel like I should have stopped reading this missive after the first phrase, which is "The economic crisis in Greece is the most consequential thing to have happened in Europe since the Balkan wars."
The Balkan wars were in 1912-1913. I can think of a few other significant things that happened in Europe since then. This crisis - it is really more of a tantrum than a crisis, since the Greeks know perfectly well they are on the hook for the money they spent on themselves - doesn't even register as a blip. It's not going to collapse the economy of the 400 million people within the EU/eurozone area, and even if it did, it still wouldn't reach the significance of 70 years of revolutions and communism and dictatorships and the freaking Holocaust and a couple of world wars, now would it?
This sort of wild-eyed panic mongering by people who take a bath on their real estate or stock purchase, and think that they are living through the worst crisis in the 7,000 years of recorded history, is beginning to wear thin. It's annoying even as deliberate hyperbole.
On top of this, the economic points made are stale and unconvincing. He talks about low interest rates being appropriate for Germany, but not for Greece. Well, guess what? You don't have to lend at low rates to Greek institutions. You can take a risk premium on top of the basic Euro central bank rates. People weren't doing that because they thought that Greece would catch up economically to the Euro average; it didn't, and the risk premiums went up. Hardly worth killing the Euro zone over this.
EDITED to add: he probably meant the wars in former Yugoslavia, rather than what's actually known as the Balkan wars. OK, but frankly, this is still crap, since clearly the creation of the Euro block itself and the unprecedented economic expansion in its new members is far more significant than a tantrum in 3% of the Eurozone. And the economic points are absolute garbage: yes, Argentina recovered, because it is a mining/exporting country and commodity prices skyrocketed. Not very relevant to Greece.
>it is really more of a tantrum than a crisis, since the Greeks know perfectly well they are on the hook for the money they spent on themselves
The Greeks didn't know the gov was in debt because Goldman Sachs colluded with corrupt government officials to hide the debt[1]. They have ample reason for a "tantrum" against their corrupt government.
Goldman Sachs has made a good business out of contributing to, and capitalizing on the, collapse of countries by corrupting their officials (Greece, Russia, the US). In my opinion, they should be treated like a dangerous cult (which is how they operate).
Come on, have you actually read the article that you quoted? It says that GS helped Greece borrow an additional $1 billion in 2002 by having it assume unrealistic exchange rates. Assuming for the sake of argument that this is completely true, this sum barely passes the threshold of significance in the mismanagement of Greece. The Greeks ran a corrupt, overspending government all by themselves, and they have themselves to blame. Maybe GS evaded half the Greek taxpayers' taxes for them, too?
The main problem with your reasoning is the assumption that the government of Greece is a legitimate democratic representative of its people. If ordinary Greeks had significant power in the political process that shapes the course of their lives, perhaps they would share responsibility, but the fact is that all the critical decisions were made and continue to be made by unelected, unaccountable, extremely wealthy elites. Terming an economically oppressed people's outrage a "tantrum" simply reveals your own bias, conscious or otherwise, in favor of the corrupt establishment, along with a distasteful bit of arrogance.
This isn't about Greeks taking responsibility for themselves, it's about Greeks challenging the rampant criminality of international banks, multinational corporations, and the governments they control. It's the same challenge that faces people in every nation on this earth, and we won't see a truly free and fair global society until every nation's people have overcome it.
So the government is not a legitimate democratic representative of its people? I didn't realize the colonels were still around. Give my regards to Papadopoulos.
On a more serious note, Greece is a wealthy (by world standards), educated, well-informed society. It is open to the world. It has open press, the internet, freedom of assembly. It has elections, and has replaced several governments when it wanted. It has a sophisticated intellectual class, which is perfectly capable of articulating ideas about social structure to the people. Can you tell me what more, exactly, does Greece need to become responsible for whatever is done on its behalf?
What you wrote in another message - "why pay taxes to a government that you feel doesn't represent you" - is the biggest thing that's wrong. You have to pay taxes because it's the law, and the government is the government, until you vote the next one in. If everyone evades taxes until the government does exactly as he wants, nobody will ever pay taxes.
Oh, and the Greeks are not "oppressed", economically or otherwise. You'd think they were being forced to toil in salt mines and fed gruel.
So you think America has a wonderful democracy too? We're wealthy, we have a constitution, we have a sophisticated (well...) intellectual class, and yet my taxes are still used to murder impoverished people around the world, support autocrats, make Goldman Sachs executives rich. But I suppose that's what we voted for after all, right?!
Greece may have a more democratic government than Saudi Arabia. That doesn't mean its people's interests are represented. They may be one of the more open and prosperous societies in the world, but even the most open and prosperous are run primarily for the benefit of special interests. I didn't think that was controversial.
"What you wrote in another message - "why pay taxes to a government that you feel doesn't represent you" - is the biggest thing that's wrong. You have to pay taxes because it's the law, and the government is the government, until you vote the next one in. If everyone evades taxes until the government does exactly as he wants, nobody will ever pay taxes."
You seem to believe that a government is legitimate simply because it is in power. To me this is both a spineless and a dangerous position. Every third world dictator hosts sham elections and of course they use your exact argument when their people complain. "But we have elections! We have parliament! If you don't like the course we are on, you are free to change it at the polls." The first world is more sophisticated in its deceptions, but the outcome is similar: the government is run for the benefit of powerful interests at the expense of the people, and election law is carefully manipulated to maintain this state of affairs. Intelligent, ethical people will reject this ruse. Legitimacy must be earned.
"You'd think they were being forced to toil in salt mines and fed gruel."
I suppose it's very easy for you to spout your trite little sarcasms from a position of comfort and privilege. Let them eat cake!
Yeah, you've got a pretty good democracy in America. The reason that it seems like it's always "more of the same, no matter who you vote for" is that the government actually has external constraints on what it does. Bush did a lot of the unpopular things that he did because he couldn't find a better way, not because he has a heart of pure evil (hard as that can be to accept). So Obama comes in and starts doing a lot of the same things, and people are surprised.
> You seem to believe that a government is legitimate simply because it is in power.
No, go ahead and overthrow dictatorships, but it you've got a government that you voted for, with a constitution that you approved, kindly follow the law. And elect another government if you want.
> I suppose it's very easy for you to spout your trite little sarcasms from a position of comfort and privilege. Let them eat cake!
You do realize there is no shortage of cake in Greece, let alone a shortage of bread? But, whatever. The oppressed masses shall rise up and throw off the chains of their class enemy, and then retire at 45! Or how about "workers of the world, unite and claim your union patronage appointments!!" Hey, these are catchy. "Burn down a bank, teach a lesson to the capitalist bloodsuckers who financed your house!!"
>What you wrote in another message - "why pay taxes to a government that you feel doesn't represent you" - is the biggest thing that's wrong. You have to pay taxes because it's the law, and the government is the government, until you vote the next one in.
The upper classes are the worst tax avoiders. It's unrealistic to expect the lower/middle classes of the Western world to pay higher taxes and get less.
From talking to Greeks, is seems that tax avoidance is a way of life for everyone from barbers and mechanics to doctors and homebuilders. Maybe the very lowest income brackets are not in on it, but it's definitely not just the billionaires and the evil globalized megacorps that everyone loves to hate.
Not saying it doesn't happen, but at least here in the good 'ole USA, it's actually fairly difficult to cheat when you are in 1040EZ territory, at least not without being really, really obvious.
On the other hand, once you start getting on the high end of things, you have multiple sources of income, some real-estate, stocks, etc... you have to hire an expert, and even then, it's something of an iffy thing; Even if you are trying to be honest, an audit is to be feared. The tax law is so complex that they usually find errors no matter how hard you try to get it right.
So yeah, I think it's fair to to say that tax evasion is a rich man's crime.
What's the use of paying taxes to a corrupt government that wastes your money and doesn't represent your interests? Tax evasion is symptom of deeper problems in this case, not a root cause.
The government did not waste the money, it gave too much to too many railroad workers, civil servants, teachers that now protest against the government that gave it money it didn't have in the first place.
And no, debt is not the root cause of tax evasion, tax evasion results in less money for the government so it borrows more and takes on more dept.
It is fairly common to describe what Wikipedia calls the Yugoslav Wars (http://en.wikipedia.org/wiki/Yugoslav_wars) as de Balkan War(s) that broke out after Yugoslavia fell apart.
I read it as referring to those conflicts. I think that makes more sense, too, as the target audience wouldn't really know of those earlier wars (I knew, but not even for a monument thought of them when reading this)
OK, OK, I agree now that that's what he meant. But for me, "the Balkan wars" is standard terminology referring to those wars, which really did involve all of the Balkans, and I thought he was making some kind of a point about a century of history in Europe coming full circle - some people like to do that. And I still think that the article is panic-mongering badly-argued long-winded garbage.
+1 on this unfortunate terminological crash: "Balkan wars" to me means the stuff that happened between 1830 and 1913 as the Ottoman empire withdrew from eastern Europe; "Yugoslavian civil war" is what happened in the 1990s/00s.
(Oh, and the First Gulf War was 1980-88, the Second Gulf War was 1992-93, and the Iraq Invasion was the Third Gulf War. It's odd how wars get air-brushed out of the record if America wasn't involved ...)
Are you referring to the Iran-Iraq war? If so, that seems a strange name for it since it mostly had nothing to do with the Persian Gulf. Though admittedly neither did the other Iraq wars except that that's where the American ships attacked from.
I was thinking what you suggest in your edit, though it seems weird to say "the Balkan wars" (plural) if you're referring to what is sometimes (and only sometimes) called the "third Balkan war".
If that is what he meant, then I think it's hard to debate what is "more significant", a change in the continent's politics with economic impact, or hundreds of thousands of lives ended and ruined, albeit in only a limited region of the continent. I wouldn't really know where to come down on that fence.
On the other hand - my history is very rough, but I do believe there is at least a case for claiming that the first two Balkan Wars had a hand in leading to the first world war, which in turn lay the foundation for the second world war... if you make that logic stick, then suddenly they were crazily important to the entire continent/world.
That's what I thought he was going for - some kind of a history-comes-full-circle argument involving the Balkans. Also, please note that I did not say that I think that economics is more important than the wars in (former) Yugoslavia. I don't know how to compare that, either. What I said is that there were more significant events since the wars in FY, and this seems clearly true to me, even just sticking to the economy.
> the Greeks know perfectly well they are on the hook for the money they spent on themselves
You mean they're more able to influence their politicians than we are? Because I certainly don't spend the money my politicians take from me, or borrow in my name.
Also, why should they pay back their debt? Nobody else is going to. We printed trillions to bail out the banks to avoid paying back our debts.
Is there any personal punishment for leaders ruining a country? There would be if the Greek ministers were committing war crimes, or if they were driving without due care and attention. Why not for "running a country without due care"?
You're going to need one hell of a prison to keep all the prisoners you'd end up with. The US is possibly the only country to never have defaulted on its debt (at one point in time, France would default by executing its debtors every couple of years). Granted, most industrialized nations haven't defaulted in a long, long time. But the point still stands that Greece is hardly the only nation defaulting on its debt right now. Only the most significant.
We haven't defaulted yet, but our current crop of politicians seem fixated on resolving this oversight...
EDIT: Oh, and if you want to get really technical the 1933 decision to not pay back bond-holders in gold but only in US dollars might have been a default (though most people dont' consider it that). And there was one point where we were late with a few payments in the 1970s due to a bureaucratic snafu.
The Greek economic situation is unsustainable. The US housing market is unsustainable. The Chinese housing market is unsustainable. I could make a longer list if anyone wanted.
My point is that this article seems to imply that Greece will be the first to go. Maybe but maybe not. If doubt shifts to US, say, the euro might look at great investment by contrast for a while.
There are two sides to this article one is correct and the other is deceitful. I assume that this article was written by a Greek (I infer this from the first person accounting of situation).
The true part of the article is the part about debtors options and possible scenarios.
The deceitful part is the part about "ordinary Greek not understanding the situation and having no part in it". In eastern Europe we have a saying that someone is "indebted as a Greek", meaning that someone is perpetually taking loans to repay old ones while having not a slightest intention of ever paying them off. And this proverb is centuries old AFAIK. So all this protesting going on, pleas of "ordinary Greek people" are an elaborate scheme of shedding guilt. Modern Greeks as a nation are an entitled (an order of magnitude more than attributed to gen-Y) and lazy bunch. Boasting their "heritage", while they have nothing in common with the antic culture.
Any businessman worth his salt will be weary of doing business with Greeks - thats how bad in general their ethics situation is. While I cannot offer any meaningful opinion about how to get out of this mess. I can try to provide some insight into how Germany and France got into this mess. The first would be that greedy coke powered bankers got all optimistic that Greeks will repay their debts this time and went on to issue insane amounts of subprime loans, ok this is not what happened.
What did happen was that western world knew full on from the beginning what would happen - but proceeded anyway, since Greece was too strategically placed in the cold war and could not be lost to Soviet influence. The Greeks being smart, knew that and took full advantage. What happened after the cold war, was basically the subprime mortgage scenario of US played on a national scale - it is fraud committed by German and French bankers over the people of EU. I'm not believing anyone "in the know" telling me with a straight face that they didn't know that Greeks were cooking their books.
So in a sense like US subprime fiasco is fraud committed by US elites over people of US, European sovereign subprime debt crisis is also a fraud committed by European elites over their peoples.
I recommend reading this analysis of Greek[1] and Irish[2] debt crisis. It has to be some of the best journalism I have ever read.
Let the Greek diaspora and leftist lunatic downmodding begin!!
Edit: Indeed it was not written by a Greek. But the part about people of Greece not knowing what is going on is pure bullshit - I am not accusing the author of having an agenda. However I am accusing him of not having balls and bringing it out.
I sincerely hope that folktales and sayings about groups are not the common source of judgement on HN. Nice also that you also have "leftist lunatic" as an explanation for any possibly contrary opinion.
Are you implying that folktales have absolutely no merit?
Also I am not implying that there are no honest Greeks. But from my anecdotal experience their moral standards are quite... flexible.
Edit: Goes the same for people of southern Italy and whole of Balkans. Have you ever been to Balkans? Are you intimately aware of moral and ethical backgrounds of peoples living here? If not - then you might be guilty of "everybody is a good person deep inside" type of thinking yourself.
Disclaimer: I am Slovenian, as you may have noticed discussions that we might be next in line to join PIIGS. And I have to admit that our nation is guilty quite of some of balkanisms ourselves (no matter how some might try to deny it).
From my own business experience and from discussions with various businessmen that have done business on Balkans as a region. I know only of handful of people that made money there (Slovenia, Serbia, Croatia, Bosnia, Kosova, Romania, Bulgaria, Greece, Macedonia and Albania).
Everybody else got shafted one way or the other.
Are accounts of Chinese shafting foreign investors/businessmen whenever they can also prejudicious and xenophobic?
I would be glad to accept your (although anecdotal) experience that proves my point wrong. Is writing by lewis (Beware of the Greeks bearing Bonds) also xenophobic and prejudicious?
What better example of xenophobia/prejudice is there than invoking centuries old sayings about people from other conutries being one way or another !
That people get shafted when doing business outside their network (cultural or national or ethnic) isn't news or specific to any region, although it's certainly worse in some places than others. But that's not what I'm objecting to.
My problem is you could have made this point without saying, essentially, "the greeks are lazy and cannot be trusted, as we have known for centuries". This type of 'harmless' bullshit popular wisdom is the ground level of every extremist pyramid.
I agree with you. And I do have prejudices, but I believe them to be well founded. It is a jungle out here (general Balkans) and one can never take enough precaution.
Thats why I chose to spell it out clearly instead of wrapping it into weasel words.
Your point about Greece losing its strategic position after the collapse of the eastern block is spot on. The inability of greek governments to adapt is in part responsible for this mess. It is also true, though, that most greeks (e.g. me) did not realize in what great peril the country was. Had we known the country was drowning in debt, we would not borrow as much and start businesses here. Unfortunately, even today, nobody has gone on trial over these grave financial crimes.
I might even argue it's also a cultural thing, in greece almost all laws are enforced loosely. Paying taxes is usually considered the dumb thing to do; you won't find many greeks being "proud to pay their taxes". Politics is impenetrable to new ideas, it's considered to be obscure like voodoo, passed on from generation to generation between 3 families (even now, the current prime minister and the opposition leader used to be college roommates).
Not all greeks are the same though, you just hear the loudest voices. Greece has a large, educated (and largely unemployed) youth that could fuel a new wave of growth now that markets are opening here. You might hear of riots, but these were concentrated on a square in Athens. I might be wrong, but there is a growing feeling that we are expecting the impending default as a chance to start over the economy, to actually do some work.
Things are changing, in the eleventh hour, for sure, but one can only be optimistic. The country is about to enter some tectonic shifts and looking to the past has nothing to offer.
It is not something unique to Greece - however it does seem to be a Balkan thing and it will take us all generations to get this train going. Like you said there are young willing educated people all over the place. However - the leeches also got their offspring, who are already being primed to take over and start the cycle anew.
Edit: When I said "people in the know" I meant Greek officials of all degrees, European officials, bankers and officials of economic institutions. The little man, deceived by demagouges could very well be oblivious to the situation.
This article reminded me of the larger issue: why do so many modern, national governments seem incapable or unwilling to ever operate with a balanced budget? Why do deficits and debt seem to be the norm? Why all the excuses? Is it a kind of stupidity brought about by having a large group of people each pulling in different directions? Or is it by design and due to malevolent intent? Just curious what everyone thinks.
Elected politicians have to aim for the short-term goal of getting re-elected. Money, and both monetary and fiscal policy, are based on collective hallucinations that people rarely think clearly about. No politician wants to be seen idle, and killing projects makes enemies, so they make new projects and spend more money.
As Bob Kerry once pointed out, sometimes it can be truly heroic to simply do nothing.
In a down economy, a requirement that the budget be balanced simply leads to a downward spiral - the state takes in less tax revenue and has to cut it's spending, which removes a large portion of demand from the economy, which results in less tax revenue, etc.
Could you be more specific about this? I've seen this argument several times, and it always seemed flawed to me.
Let's say you cut the budget by X. Part of this X (X') doesn't get invested in money making enterprises any more, and less money goes back as taxes (X" less money).
Now, unless the economy is super efficient, I'd say X > X' > X". And given the realities of public government, usually X >> X".
How is then any better to borrow X just to get back X" (and still owe X), then to simply lose X"?
You cut the budget. Some companies go under, increasing unemployment. Unemployed people not produce and do not pay tax, but they continue to consume and receive government services (traffic lights, toilets, parks, police, firemen, etc). To further balance the reduction in tax revenue from the increase in unemployment, you cut the budget some more. Some more companies go under, further increasing unemployment, decrease tax revenue, leading to further budget cuts etc.
I think you are missing the downward spiral part of it. Today's budget affects tomorrow's economy which affects tomorrow's budget (through tax revenue), ad infinitum.
Balancing a budget in a recession does not subsequently mean that the state will take in less tax revenue. It also does not necessarily mean that a "large portion of demand" will go away. That would depend entirely on what was cut.
However, consistently running an unbalanced budget will most definitely lead to a "downward spiral".
What kind of government spending can you cut that does not reduce demand of some kind in another part of the economy?
If the answer is "entitlement spending", where do you think the money spent by the government on Social Security/Medicaid/Medicare/welfare/jobs programs/etc goes? Into consumer's hands and right back into the economy.
When you owe the bank $1 million the bank owns you, when you owe the bank $469 billion, you own the bank. The average greek is smart enough to know this and knows that the closer they get to default the better the deal they will get. The banks have two options, get nothing, or get something.
Also, if the Greeks' can't pay at a AAA rating they certainly can't pay at AA rating, nor A, not BB, so the end game for rational thinkers is default because as the rating drops the inability to pay increases. Since Greeks hold EU notes and EU denominated assets they can't even be screwed via an exchange rate mechanism. If Greece defaults Europe basically has to eat it, and it puts Europe in a much worse negotiating position with Spain and Portugal.
Furthermore, with regard to bond pricing there is no such thing as a bad bond, only a bad price, hence they are quickly being priced to zero. It's similar to the whole subprime thing, guys who bought subprime post Aug 2008 actually did alright because the prices were so low that you'd be somewhat likely to get your money back.