As I Greek, having the experience of the Euro both theoretically and practically, I can say that the currency per se, it's not a problem but given the way the ECB acts the last 3 years, I don't understand why would anyone give-away the control of the countries currency to a board of people who act in very controversial ways..
Do today's Greeks blame the bulk of their economic problems on outside forces, rather than things they've done to themselves?
edit: I don't really have an agenda with this question - I'm not a European and I'm not invested in any way, really - and I'm a little surprised at how quickly it got voted up. Please just treat it as a sincere question.
In economics, everyone is always looking to blame everyone else. But the fact remains that, once the initial recessionary shock is over, whether or not an economy recovers depends almost entirely on whether the central bank follows mainstream economic principles, or the pseudo-principles that are popular among politicians and pundits. Israel and Australia are known for executing the former. The Fed split the difference. The ECB has taken overwhelmingly the latter course, and Europe is paying for its love of convenient, self-flattering economic narratives.
The policies and the policy effects of central banks are measurable in elementary ways. This is not an opinion. It's very important to realize the role of the ECB and the Euro in this recession, because the current popular alternative--mindless national hatred--has not turned out very well for Europe, historically speaking.
> The ECB has taken overwhelmingly the latter course
Not seeing this. Unlike most national central banks, the ECB is also not concerned with national economic issues such as fiscal balance, tax revenues, employment numbers, national trade balance etc. (This may well turn out to be a blessing in the medium-term or long run. Perhaps by design?) They're exclusively tasked with maintaining a certain level of price stability within the eurozone. Draghi even declared recently that they don't even give a hoot about the EURUSD exchange rate! Now maybe internally they do care about it emotionally, but it's not their mandate to worry about it.
Now granted, with their weight they did have the resources to buy up some 200B of "temporarily tanked" eurozone government debts in a time of crisis, which they then sold on at a later point "for a profit" (nominal, not that I think they really care, but a good for the public), which elegantly weathered "the euro crisis". Not the Greek or Spanish or Italian economic woes, to be sure. But "the euro crisis", back in 2011 or so. Done deal.
(Good thing, I think personally, they're not blanko-buying-up $1 trillion of EU government debts per year currently... sure the Greek equivalent of the S&P500 might "soar" for a year or two but it wouldn't be felt on the ground, I don't think... )
I largely agree with what you write, but I'm somewhat skeptical about blaming the ECB. The thing is, it seems that monetary policy is actually pretty powerless when your goal is to increase economic activity (rather than slowing it down).
Point in fact, what could the ECB have done better? They could have reduced interest rates faster and more aggressively, but would that really have changed so much? What else could they have done?
I think the blame lies squarely on fiscal policy, namely the European obsession with austerity. Mainstream (that is, non-pundit) macro-economics correctly predicted that austerity would hurt, yet European politicians still follow that prescription.
In part, the structure of the Eurozone is at fault. If the automatic stabilizers like unemployment insurance and other social programs had been a part of a supranational budget, the crisis would never have become as deep.
The problem is their messaging. If they stood up and said to politicians "You must spend money to pull your economies out of the slump", it would have been much better.
Also, even if it wouldn't have been that effective, more aggressive interest rate moves would have done something, and that something on the margin means less suffering in the world.
I don't know much about economy but my understanding of it is that, given their accounts faking and the resulting over-inflated GDP the greek would have tanked either way. But the eurozone almost following them in the abyss and being in the hurt for years ? That entirely on us.
I don't see the ECB's actions as problematic, rather the fact that there is an ECB. The numerous countries with differing economies using the same currency means that they cannot each be controlled according to their individual needs. Too tightly coupled.
Isn't it a bit much to say how the world's major financial problems could be solved if they only listened to you? This also wasn't even the question asked.
The Greeks believe what their media says. So it depends on what media they are following. In general although politically active, knowledge about international politics is not wide spread so everybody blames mostly the Greeks. Half of them blame the people, the other half blames the government. I disagree and I believe that Greece for the most part wasn't master of its own fate.
Disclaimer: I am Greek
Many of them perhaps tend to, but it's irrelevant to his point.
Having own currency allows for nation-wide bloodletting through inflation, a classic option of dealing with economic collapse. Having succumbed to Deutschmark er.. Euro, they lost the easy option.
One problem with defending the Euro is that some of the best anti-arguments are also the most easy to understand. But ask the Japanese how easy it is to actually inflate a problem away...
On the other hand "massive inflation" isn't exactly the easy option. It's just very easy to understand if you are prepared to oversimplify macroeconomics.
My first reaction was irony to a very well-known propaganda that is sold throughout Central-Northern Europe to justify totally irrational policies which drove an entire nation to it's knees.
But before going into that, I'd like to ask you to be more specific: To which things are you referring to?
So prior governments didn't falsify financial records like they say themselves? Greece did not take on more debt than even the faked statistics supported?
You are saying, contrary to propaganda, the greek government sector and the state-run enterprises were in a splendid and efficient state a couple of years ago?
Furthermore, contrary to propaganda, their is no problem with the completely ineffective and unefficient tax collection system?
All that is of little relevance, because the crisis in Greece is not a crisis of inefficient use of resources. It is a crisis of disuse of resources. Just look at the unemployment numbers to see what I mean.
Had Greece not been part of the Eurozone, their currency would have lost value during the crisis. This would have driven a recovery as Greeks would have turned to producing more things locally, both for domestic use and for exports.
I know very little about economics and even less about politics, but it seems to me that a currency losing power would be a much "softer" landing for everyone involved. Right now, since there's no currency to devalue, we must cut salaries and lower all the prices through market effects.
This has a very negative psychological effect to people who see their salaries cut to a third of what they used to be (rather than seeing imported goods rise to three times their former prices), and doesn't allow exports to become instantly more competitive by virtue of being cheaper right away.
I agree with you that, if Greece weren't part of the Eurozone, things would at least have been smoother.
Talk to Argentina about "softer landing" by hyperinflation. Even with faked statistics they are still worse off than Greece and while their situation certainly could be worse, it could also be a lot better.
But as long as you say you don't understand economics or politics, the mistake of oversimplifying monetary economics is understable...
Why should we take Argentina as an example and not Iceland[1]? Because it fits your view, or because you have a deep understanding of economics?
BTW Argentina followed the IMF as many other countries. None ever recovered. Iceland did not, proved to be better off.
Stiglitz and Krugman (both Nobel prizes) share the same view on this matter and Greece (should have opted out of the Euro and defaulted in 2008, in 2011 everything would be fine).
ps. Another fact that you're missing here is that you think this Crisis in Europe and US has to do with economics, while it's clearly a political crisis. The numbers never turned up right, Greece will never pay the debt, there were no financial reason to punish Cyprus other than sending a political message, etc. Even the IMF said that the Greek program was mis-calculated because doesn't wont to be part of the eminent epic failure...
> For every imaginable problem there is at least one simple, clear and obvious solution that only makes the problem worse. If Greece hadn't defaulted, they wouldn't have cut 25% of the public workforce. Oh no. They wouldn't have been able to pay nearly any salaries.
> So prior governments didn't falsify financial records like they say themselves?
Yes they did. Goldman Sachs did it for Greece and many other countries like Italy for example. France, Italy, Greece and many others never respected the 3% budget deficit imposed by Maastricht crieria.
> Greece did not take on more debt than even the faked statistics supported?
Greece did, but everyone knew it and allowed as long as they saw fit. Also there are hints that many other countries did. Goldman Sachs didn’t offer it’s services only to Greeks. That was a very well known method of falsifying the statistics.
As a side-note… The man who acted as the middle-man for this fraud, was Lucas Papademos. It was Merkel’s first choice for Technocratic Prime Minister in the short period Greece stayed without PM. It’s a little bit weird to choose the man who is responsible the very thing you blame them, to lead the way.
> You are saying, contrary to propaganda, the greek government sector and the state-run enterprises were in a splendid and efficient state a couple of years ago?
No of course not. But in many cases they were almost entirely forced to make uncomfortable choices by Germany and France. Local army companies were out of business because of forced contracts the country did with Germany in order to buy things that could be produced at home, while at the same time paying the employees to buy votes. The national railway got into debt because of accounting tricks more than anything else.
Greece since 1821, was never a 100% free country, in the sense that was able to make sane choices. Take a look a this submarine[1] story or the Siemens[2] scandal.
> Furthermore, contrary to propaganda, their is no problem with the completely ineffective and unefficient tax collection system?
Even if you assume that Greek corruption is the problem in Greece, does not explain what is happening elsewhere. Let’s say in Greece the problem is corruption. What’s the problem with Italy, Ireland and Spain?
You are mixing two different problems: The Euro zone allowed Germany to export it’s expensive products, for 20 years to all these countries they are trashing now as PIGS, by allowing them to expand their credit.
Give it another two years and the German economy will sink like everyone’s else, since exports to Mars are not possible as of today :-)
> I didn't know that, I am very sorry...
You’re sorry for what? I’m Greek and I’m not sorry for Greece. I know that to an extent it’s getting only what it’s citizen deserve by being so afraid of change. But really, what is happening in Greece has absolutely nothing to do with Greece’s flaws and everything to do with Euro-zone structural problems. The problem is political, not economical, at every level.
To give a perspective: 3 years ago, in 2009, my Italian uncle made the same exact reasons of why Greece is in trouble and Italy will never get there. I told him the same things and that Italy was right on track, because what is happening in Greece is not related to Greece but to Euro. After a year we had the same conversation again and he agreed. Because he saw the same thing happening to Italy, which has corruption at all levels, but it’s way more balanced than Greece (which has no division of powers, French revolution didnt pass by).
The currency is never the problem. Not having goods/services which are on par with other member states prevents internal trade. Not being able to devalue your currency prevents external trade. That creates debt which Germany and France buys and whoopdy doo, poverty and extremism.
The expansion of the euro into countries which aren't realistic trading partners is the problem but Germany and France love it, it means more long term wealth for them.
Latvia has exports, including to France and Germany, that means that there are goods that are on par or better. Devaluation does not solve anything long-term. What solves things is investment in high-added-value manufacturing and knowledge-based services. Or as you call those investments "buying dept".
There is no point for France and Germany to "buy [our] debts" if there is no expectation on our ability to repay those debts, likely from the new production.
You are confounding several things. It is NEVER cheaper to import than to fish, because importing costs money and fishing does not.
What you mean is that the opportunity cost of fishing is higher than its market value, meaning that there is another job that you can do for 8 hours that would make you more money than the fish that you could have caught in 8 hours would be worth. For that to be true, you need that job to exist that you can do, which is not always true in high unemployment situations.
And when that IS true, then it is a good thing, because that means that the economy as a whole is working more efficiently - you are not spending your time doing useless things, you do something more productive instead.
Latvia was put through an austerity program despite having their own currency. Hard to say if that was the right thing. Now that Latvia has a 5%+ growth rate, success has the proverbial 1000 fathers.
A single currency is the best feature of the Eurozone. Politicians can't pull devaluation stunts anymore, and dealing with a single currency makes trade in Europe a lot more efficient. The European Parliament and the Commission is the biggest problem with EU in my opinion.
In order for a common currency to be valuable in any way, you must have a common monetary policy, which practically means that every country should hand much more power to Brussels.
No one is willing to do so, so we ended up with a totally irrational scheme on which you have the ECB controlling the money flow, while politicians with different agendas throughout Europe act like they don't depend on each other.
Either we need to unite Europe, politically, or the EU project is doomed. There are any pro-Europeans left in the South, and being lazy or corrupted has nothing to do with this.
Germany might be the only country who really benefited from the Euro, boosting it's exports beyond what would be possible without the Euro expanding the credit level.
All others in the long run are doomed. No wonder the UK never gave in.
Plenty of countries have had common currencies throughout history without having a common fiscal policy (I'll assume you made a mistake when you wrote "common monetary policy", since monetary policy is the very thing you give up when you adopt a currency beyond your control). Many great empires, from the Duth republic to the British Empire, were built during periods when their government had no control over their currency.
My friend, having lived in a country which "pulled a devaluation stunt" of 25% (the UK) let me point out the currency devaluation was market driven and necessary because in the wake of the financial crisis the pound was very obviously overvalued.
And the terrifying bogeyman of hyperinflation?!!! 5% for a couple of quarters and now it's at around 2.1%. And that's after said devaluation and bucket loads of printed money in the form of QE.
In other words, I think your cure for is worse than the disease.
QE is free money which has seeped into the stock market and housing market for a feel-good factor, but it hasn't fixed any of the structural problems in the economy.
The Bank of England has kept interest rates at record lows for the longest period of time in its entire history. That should tell you the scale of the problem.
Now, if low interest rates and QE were "good" for the economy, it would be the default strategy not the one of last resort.
Don't be so quick to rule out hyperinflation. At some point, this charade will come to an end.
QE fixes some problems. It makes other problems worse.
If everyone has borrowed too much money, the QE can fix it. It would be better if the regulators stopped banks from being irresponsible, but it's unrealistic to expect the government and private sector will do their jobs perfectly.
If sticky wages are causing problems, inflation can fix that. Forcing wages down via inflation doesn't hurt workers so much, because it also means their debts will drop. (Yes, it punishes savers, but Greece apparently doesn't have too many of those).
Assuming the central bank is mildly competent, it's good to have that option. The problem is, the EU might not have one single problem. Wages in Germany might be fine, while wages in Greece are too high. If the EU creates inflation, it will unfairly cause German workers to have a pay cut. If it keeps money tight, then Greek wages will be too high.
If there were uniform standards for banks, wages, etc, then it wouldn't be such a problem. But Greece and Germany are different countries, and they'll have different standards. So the EU can't manage inflation is a targeted way.
Take a single country, like the UK, why should hard-working folk who save their money be punished? Why should their savings be eroded with inflation and a real interest rate which is negative?
Why should those who were irresponsible, those who borrowed too much or took risky bets be the ones who are protected?
The problem is debt, and the solution is not more debt and reckless money printing.
You are wrong. You have the evidence of the past five years in front of you. The UK and the USA pursued money printing and it has not resulted in any disaster. The eurozone is a hairs breadth away from deflation, much of the eurozone is at or near recession if not outright depression and youth unemployment is high and getting higher.
And this is in a region that suffered nowhere near as badly in the initial financial crisis, it has been brought about by an incompetently created currency area and an idiotic central bank.
Are you forgetting the derivatives which major banks hold? JP Morgan has outstanding derivatives in the trillions. Ask the US comptroller general who reported around $78 Trillion just two years ago.
Even if netted out, if just some of those bets go bad, the bank is insolvent. It does not have the capital base to withstand such an event. Not even if it grabbed all the client bank deposits on hand (like in Cyprus), it is bust.
Ordinary people get stuffed with austerity and savers get stiffed with zero percent interest. Meanwhile banks are given endless overt and covert sleight-of-hand bail-outs.
QE is not designed to save the economy or help workers, it is designed to save the banking system and the insolvent banks within it.
Yes, but savers still do pretty well. QE will save the economy, but not house prices, and not the people who bought multiple leveraged IPs. Savers will still be OK (since the money multiplier will drop there won't be inflation - this can and should be enforced with more prudent bank regulations).
And if deflation hits, savers will be less fucked, but still pretty fucked.
Er, banknotes in circulation is literally money printing yes, but not what people refer to when talking about "printing money". Most money isn't cash, and the amount of cash is fairly irrelevant in a modern economy.
I think you've missed his point. If the ECB prints more money but most of your trade is with other Euro countries (which it will be) then you can't really use the devaluation trick.
That's what Latvia did - 20% wage cut across the whole country, up to 40% wage cuts in some areas. Government sector lead the way and privates followed. Devaluation also destroys any savings that people might have AND makes the country less safe for the investors.
To implement, yes, but the impact is the same. Those devalued wages are now worth less when it comes to buying imports, and since (to a first approximation) everything in this globalized world of ours is imported, even local goods and services have to hike up prices in response.
They money being literally printed is a negligble amount and has effectively no effect on the value of the euro. Even if all those printed hundreds of billions were to be destroyed the result would be an inconvenience and nothing more.
"Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system."
~ "FOA", ca. late 2000 / early 2001
From the outset, the currency was designed to be used fairly similar to any other "shared unit in common use across borders", such as meters or degrees-celsius.
Consequently, local/national government continues to decide on their country's fiscal and economic policy (and deals with their employment, debt, taxation etc. issues), whereas the currency unit is to remain merely a non-political means-of-exchange for trade settlement (as a result, identical products have widely differing prices across the euro zone, this is anticipated and accepted by the design) that is to be managed by ECB (which has NO other mandate unlike the Fed that has to worry about employment and economic recovery etc. etc.) at a steady "2%-or-below" inflation rate for a certain level of price stability across euro-zone.
Usually in exchange for other perceived advantages? -- Less travel restriction, a more open market for products, potentially ability to look for jobs in other EU countries (but I am not 100% sure about this one).
EU and Eurozone are not linked. What you talk about is joining th EU, which Latvia is already a member of, and which doesn't imply using the Euro as currency.
First Latvia was occupied by the Soviet Empire, and all that entails, the purges, the gulags and so on. Then it was occupied by the Nazis, and all that entails, death camps and so on. They were especially keen on punishing anyone they thought might have found a way to co-exist with the previous invaders. Then after that, the Soviets again, keen to punish Latvia for "surrendering" to the unstoppable Nazi war machine. The Soviets were keen on lebensraum too, and set about deporting Latvians on an industrial scale, and colonizing the country with Russians.
They are still finding pockets of exiled Latvians deep inside the Russian interior, and asking them if they want to come home.
The Eurozone (Germany mostly) is getting closer and closer to Russia. I don't think Latvia will gain any advantage from this.
Take a look at what happened to Cyprus. They (the EU) would never do that to Italy, no matter how crisis-striken would ever be. Meaning: Say tomorrow Russia invades Latvia, the EU will do a couple statements and that's about it.
How an attack on a EU member state will be reacted to will set precedent. The EU cannot afford not to react to such an attack with full military force no matter which member state is attacked.
Apart from that the majority of states in the NATO are also EU member states, meaning that the EU has effectively control over the NATO. Also something that might be worth considering in such a scenario.
On the other hand, the baltics are primarily of interest to Russia as a buffer against invasion from the west, so it is at a time of antagonism between Germany and Russia that Latvia would most need to fear Russian invasion.
Latvia can always invoke Article 5 of the NATO treaty, anyway.
In addtion to the things that other commenters have mentioned, there is one more difference between having your currency pegged to the Euro and being a Euro country: when goods are traded between two Euro countries, these goods aren't really paid for. Instead, the sale is transacted through the so-called TARGET2 system. Wikipedia describes it like this:
A Dutch importer, for example, might place an order with a Spanish company. Payments to and from the accounts of the buyer and seller are channeled via central banks, so the Spanish exporter's bank gets a credit with the Banco de España, which in turn has a claim on the ECB. The Dutch importer's bank owes its local central bank, leaving De Nederlandsche Bank with a debit at the ECB.
The idea behind this was that the liabilities within the TARGET2 system would cancel each other out. To everybody's utmost surprise, however, this has not happened. For example, Germany is currently being owed over 650 billion Euros. Needless to say, the countries who owe this money don't have it anymore.
> when goods are traded between two Euro countries, these goods aren't really paid for
This is a very politically biased and misleading perspective on reality.
Consider an alternative world in which the central banks of the Eurozone would have been consolidated entirely. That is, no more Bundesbank, no more De Nederlandsche Bank, only the ECB. All commercial banks would have central bank accounts directly there.
In this world, everything in the real economy would look exactly the same as it does in our world.
However, this alternative world would not have Target balances in its central bank system, and therefore nobody (including you) would ever even think to write that "goods aren't really paid for".
But how can it be that goods are paid for in this alternative world while they aren't paid for in our world? The answer is that that just doesn't make sense.
Goods are paid for even in our, non-hypothetical world. Yes, there are flow imbalances, but guess what: That happens in every region ever that has a unified currency.
If you don't like that, then please just be honest and come right out and say so. Don't try to cloud your opinion in misleading rhetoric.
> The idea behind this was that the liabilities within the TARGET2 system would cancel each other out. To everybody's utmost surprise, however, this has not happened.
So the eurosystem has been in the making for many decades, developed by many central bankers, and you are now here implying all of those central bankers would assume such a thing (it all cancels out) and could not predict that it would in reality NOT?
Of course, over any given time span --a month, a year-- not all trades will cancel each other out immediately. That's exactly why they have accounts and claims as core of the system. To keep track and balance/settle eventually in a stable "supra-national" unit, rather than one wildly fluctuating or politically-manipulated national or another.
Pretty neat if you ask me. Sucks for "notorious net debtors" of course..
Latvia has been a member of the EU since 2004 (which entails all you mention), and now it joined the Eurozone as well, and will use euro as its currency.
EU countries other than UK and Denmark (who joined much earlier) are both required and allowed to adopt EUR as currency only as soon as they fulfill certain economic/fiscal criteria (don't have the exact figures in my head, easy to search though), whether intentionally or accidentally.
Actually no. The UK is special in that they do not have to join the eurozone unless they want to all other EU members have to join the eurozone once they fullfil the necessary criteria.
They've also had their currency pegged to the Euro since 2005 (https://en.wikipedia.org/wiki/European_Exchange_Rate_Mechani...), so in a sense their currency has already for years been treated commercially as merely an alias unit for the Euro, like one converts lbs and kg at a fixed rate. The main difference with actually adopting the Euro is: 1) harder to change your mind later, since un-adopting the Euro is harder than abandoning a currency peg; and 2) easier for tourists and cross-border business, since the need for currency conversion & the associated fees is removed. It might also simplify cross-border business accounting, since you'd no longer have assets & liabilities in different currencies (even if pegged ones), though I know less about that.
Denmark is in a similar situation: the Danish crown is pegged to the Euro since 1999, so in practice Denmark has no real scope for independent monetary policy. Public opinion is still against joining the Euro for a mixture of nationalistic reasons (people like the currency as a symbol of sovereignty) and value put on having an exit option if things get too dicey (one exit option is to peg to the Swedish crown instead; another is to fully float).
I can read your comment as pointing this out already, but an important third option is to stay pegged to the Euro, but at a different exchange rate. That's a very large freedom that you lose when you "formalize" a Euro peg by just switching over to the Euro.
For example:
Year 2024: Our currency is pegged at 3.28 to the Euro.
Year 2027: Euros have become too valuable; our peg is now 4.1 to the Euro.
Good point, that's definitely another ability a country in ERM retains (though if done unilaterally it would still constitute pulling out of ERM as a treaty). That's what China does with their unilateral and occasionally revised peg to the dollar, for example.
I'm not entirely sure what the results would be, but you do lose some of the current benefits if people start believing the exchange rate is no longer really fixed. Currently the large amount of Danish-German cross-border trade effectively ignores currency exchange risk, because they assume the EUR-DKK peg as formalized through ERM is solid enough that it won't change in the forseeable future. So it's "safe" to have liabilities in DKK and revenue in EUR or vice-versa without taking any particular measures to hedge your risk. That was part of the goal of both the Euro and ERM, since being able to ignore exchange risk makes it easier for businesses to treat Europe as a single market. Once you change it once, then it might be a while again before businesses feel comfortable relying on the new peg.
They are fued.. I feel sorry for them as a European. Our politicians will rip their economy away. This pact they signed essentially sold their country including their people. It's always the same, the strong countries look for weak countries to join their forces by promising money. When the small countries need the money the most, they will get promises and packages coming with many hooks. Hooks that will cripple and kill the economy of the country, such that at the end the strong countries can suck up all that is there. Their money, their land, their resources, their best engineers and workforces. And what's left at the end is not a country, but a lost fight. A fight that was never fought and silently won. Both governments win and assure their own security in trades and assets, but the people loose.
That's not one of the 18 countries in the Eurozone, though. The Eurozone consists of: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
The UK is one of the 10 countries in the EU but not in the Eurozone: Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Lithuania, Poland, Romania, Sweden, and the UK.
