SGP3: Opinions from VoxEU

So the proposals of the European Commission for reforming the SGP have provoked s number of reactions from the good people at VoxEu.org. There seems to be an agreement as to the vagueness of the extra indicators, and their difficult enforcement. The SGP remains a legalistic punishment mechanism rather than a tool incentivising good counter-cyclical fiscal policy. Finally there seems to be dome disagreement about the appropriateness of the debt requiremen, while consensus is still that more can be done to increase ex post credibility of the pact. Wyplosz' "Not yet fiscal discipline, but a good start" : First, he identifies the two prevailing and competing opinions about the failures of the SGP. The "Germans" argue the penalties aren't tough enough, while the "institutionalists" argue that it is the objectives and the framework itself that isn't good enough. Apparently the EC focuses enough on the one but not enough on the second. This might be aided by the creation of a permanent EFSF. He does not consider the debt criterion appropriate but maintains that the way the commission found around the 60% limit is clever. Manasse's view, expressed in his contribution "SGP: Counterproductive Proposals" is much more negative. He criticises the SGP's continued obsession with ex-post punishments as an incentive for good behaviour in food times. He rightly argues that this fixation painfully continues to leave the cyclicality of fiscal positions out of any meaningful discussion. He also finds it difficult to formally impose new limits on debt, which would expose every country to penalties and on the loosely defined "macroeconomic imbalances" causing fragilities. Nonetheless, he praises the introduction of medium-term fiscal plans and the implementation of best practices for fiscal policy across the eurozone. Giavazzi and Spaventa, call the proposals for the SGP empty and useless. For them, the indicators added by the Commission's to help identify unsustainable policy courses are vague, and corrections to them are difficult to enforce. They also criticise the commission for focusing too much on ex post punitive actions against the states, rather than ex-ante preventive steps. Finally they maintain that the biggest problem has been private debt and as such praise the creation of the ESRB.

Interesting Contributions: Daniel Gros

EU or Euro-zone seat at the IMF

How to avoid trade war: A reciprocity requirement

How to deal with sovereign default in Europe: Towards a Euro(pean) Monetary Fund

EU-China: We push them, they push back...

Here's how the much touted EU-China summit ended. So not so well... Now what's next? Do we sanction them and risk alienating them? Or do we just wait it out and alienate our electorates further. It'll be interesting to see how things process from here, but clearly there's no clear cut answer to this problem. China is too big a risk...

Wofgang Munchau on the Chinese Renmimbi Manipulation

If you are interested in what happens in the world, please read this article by the FT's Wolfgang Munchau.It summarises the economic logics underlying the discussions about Chinese monetary intervention. More importantly it argues for a forceful approach to Chinese monetary manipulation. I'm a big fan of his blog, and even if I don't always agree with him, he is always insightful, clear and fair. He mentions an article from VoxEU contributor and Centre for European Policy Studies' Director Daniel Gros, which very intelligently argues for the use of reciprocity in arguing for capital controls, which would be legal, apparently, against the much touted trade wars.I agree with these means, as it seems nothing better exists. However, I believe his analysis may be slightly myopic.

International Cooperation: China-EU Relations

So there has been a lot of interaction between EU and China, as of recently. I'll start with the following article from the Chinese Embassador to the EU, where he praises the Lisbon treaty and it's ability to increase European integration, thus endowing the EU with a new authority and consequent ability in international relations, fundamental to the EU-China foreign strategic relationship (whatever it may be...).

Then we follow with the renewed calls for Beijing to allow the renmimbi to float, which is really to say that the EU and the USA want it to appreciate.

The Chinese on the other hand want to leave it be for fear it'll create chaos, which I'm assuming they fear would be large enough to topple the single party regime.

At the same time the Chinese seem to have requests of their own, involving European countries giving up some of their IMF seats.

What does all this chatter mean?

European Fiscal Federalism (Part 2): OCA theory and the effects of asymmetric shocks

The first part of the comment described in the previous post belongs to a part of economics which is highly relevant for the Euro area, known as OCA (Optimum Currency Areas), their characteristics and their behaviour when faced with internally asymmetric (-like) economic shocks. Charles Wyplosz and Richard Baldwin have an extremely good book on the economics of the EU, which discusses this at length. DeGrauwe's book has a somewhat more superficial dicussion of a similar scenario, focused on the interest rate, while von Hagen and Mundschenk elaborate more thoroughly on a scenario closer to DeGrauwe's. Finally, Beetsma, Debrun and Klassen also provide some insights. The scenario discussed below is inspired by Baldwin and Wyplosz' but I've added some details.

European Fiscal Federalism (Part 1): Introduction to the “irrefutable”

It seems that weekends are only reserved for Lady Ashton. On Sunday 8 August, Mr Janusz Lewandowski, the (Polish) EU budget commissioner started floating around the idea of a European tax to be levied by the European Commission on banks, financial transactions, carbon emissions (permits) and air traffic. Berlin, Paris and Westminster were not amused, but Poland, Austria, Belgium and Spain seemed to not dislike the idea too much. Anyway, this is part of the ongoing process of preparation for the 2014-2019 budget which will be presented by the afore mentioned Commissioner at the end of September 2010. Most interestingly of all for me was the response that the proposal received from the Financial Times. I believe that unless you've subscribed to the ft, even if only for free, you can't read this article. It's not complicated but I assume not everybody can be bothered to do it. As such I feel compelled to report some of the comments which are rather strong:

Markets, Information, Communication and the Euro-zone Fiscal crisis

Above you can see a segment from an extremely good article by Carmassi and Micossi which can be found at VoxEU. It is about the chronology of the fiscal crisis in Greece and how miscommunication between the European Commission and Germany may have made a mess. To be honest it should be said that they do survey a very limited and rather biased sample of newspapers (Thompson-Reuters and the FT), but it is a fairly acceptable simplification from constructing a weight matrix for a larger number of newspapers that would provide a rather limited improvement of the explanation. A "must read" nonetheless!

VoxEU and Policies for a Europe in a Fiscal Crisis

VoxEU, that "not-for-profit" beakon of economic thinking, has released a very good eBook on the ongoing fiscal crisis, edited by Richard Baldwin and Daniel Gros. I take the liberty of pasting the table of contents from the link above. If you have any interest in economic policy and the future of the EU, you can't miss this.

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The eBook’s Table of Contents

Completing the Eurozone rescue: What more needs to be done? Edited by Richard Baldwin and Daniel Gros

Introduction: The euro in crisis – What to do? Richard Baldwin and Daniel Gros

Drawing a line under Europe’s crisis Barry Eichengreen

The Eurozone needs a political union, or at least elements of one Paul De Grauwe

The Eurozone's levitation Charles Wyplosz

Eurozone governance: What went wrong and how to repair it Jean Pisani-Ferry

The European bicycle must accelerate Angel Ubide

What more do European governments need to do to save the Eurozone in the medium run? Thomas Mayer

The narrative outside of Europe about Europe’s fiscal crisis is wrong Avinash D. Persaud

Rethinking national fiscal policies in Europe Philip R Lane

A credible Stability and Growth Pact: Raising the bar for budgetary transparency Michael C. Burda and Stefan Gerlach

Fiscal policy at a crossroads: The need for constrained discretion Antonio Fatás and Ilian Mihov

Fiscal consolidation as a policy strategy to exit the global crisis Giancarlo Corsetti

German spending is not the cure Alberto Alesina and Roberto Perotti

The long shadow of the fall of the wall Daniel Gros

What are PGS doing?

What are Portugal, Greece and Spain doing about their fiscal positions?

Here's an account. It is rather incomplete, but it gives some insights. For simplicity, and because it is originally in Portuguese, I include the picture below in this post. The conclusion is that they are doing something, and except the unavoidable tax hikes, the reforms seem to be quite positive for productivity, savings and growth. Hopefully some of these reforms will be permanent...

I will also try to see if I can find the links to the Stability and Growth programmes that these countries submitted to the European Commission.

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(This is a late addition to the original post)

For another overview of the situation with the PIIGS, here's what The Economist has to say.

It's so annoying I'm starting to get depressed...

I feel for European Integration, particularly the economic part of it. It never has any respite. It is constantly attacked from every corner. Today the Euro is attacked for being too weak as a result of the fiscal crisis. Yesterday it was accused of threatening European competitiveness because monetary policy was too strict thus causing exchange rates between the Dollar and the Euro to be too high. Before that the problem was that European currencies fluctuated too much among themselves, thus creating comercial tensions between the EU's member states. We are sklerotic, we are Byzantine and we are lazy. We don't innovate and we are too rigid. Now we are too flexible and soon we'll be extinct. It seems that the only time we were happy was during the "30 glorious" years after WWII. How ridiculous that support for Europe is dependent on economic growth. This crisis will pass as all others have and as the next ones will. The world will not fall apart, and the Eurozone won't desintegrate. The European Dream will survive, but nay sayers will always find an excuse to say that it is falling apart.

It's going to be painful,but European economies will pull through. Commentators are talking as if this was the first time we had to tighten our belts... Portugal had to be bailed out by the IMF in the 1980s. My country has a lot of problems, but we pulled through. There's no reason Greece, or any other country, won't. We'll fix our houses; Germany, France, the Benelux, Sweden and Finland will make sure of this. In some years we'll be fine. The Euro will be close to parity with the USA, and eventually inflation will calm down. We might even experience a little bit of an export led boom, and hopefully the weight of fiscal pressures will revive budget rationalisations about defence expenditure. Not withstanding my ideosincracies though, Gideon Rachman is depressed... and his is a pretty contagious sort of depression. On the other hand, there's always Liberation's Jean Quatremer, who at least is slightly more realistic about the cyclical nature of this pessimism. Charles Wyplosz also offers some comfort in this article from Bloomberg.

The Southern European Problem: Not Speculation, Not Just Fiscal Profligacy, but Structural inconsistencies

Wolfgang Munchau of the FT has a very good article published online last night, about the problems in the Eurozone, particularly in its southern members. (here's a little trick for accessing restricted news reports from the FT: Copy paste the title of the relevant article on google and click on the relevant link. For some reason this grants you access to otherwise restricted articles) It says that the problem is not speculative financial attacks on the debt of these countries, nor that it is just fiscal profligacy. It argues instead that the root problem is structural, and that there is a need for economic reform of the labour market, where wages are much above productivity. As a result these countries are not competitive vis à vis its northern neighbours.

I completely agree with it. But I need data to confirm this. I'll be updating this post.

What future for the Euro after the bail out?

5 very interesting articles from www.VoxEU.org :

"Greece: The start of a systemic crisis of the Eurozone?" by Paul De Grauwe, from Leuven

"Greek lessons", by Michael Burda and Stefan Gerlach, felows of CEPR

"European Stabilisation Mechanism: Promises, realities and principles", by Charles Wyplosz, CEPR fellow

"Financial Stability beyond Greece: Making the most out of the European Stabilisation Mechanism", by Daniel Gros and Thomas Mayer, CEPS and Deutsch Bank respectively

"How to deal with sovereign default in Europe: Towards a Euro(pean) Monetary Fund", by Daniel Gros and Thomas Mayer, CEPS and Deutsch Bank respectively

Eurozone inevitably an Optimum Currency Area (OCA)?

I posted the following comment on Prof. Krugman's blog for the New York Times. What do you think?

"

Prof. Krugman,

As you say the arguments on the shortcomings of European EMU as an OCA have been known ever since the early 1990s. If a group of economies are very open and trade in differentiated products, then as they are exposed to asymmetric shocks, they must have flexible wages and prices, high labour mobility, or alternatively, there must be some form of homogeneity and/or solidarity to ensure that transfers from one country to another balance the asymmetric shock. Otherwise one group of countries benefits from the union at the detriment of another. This is simple enough and it is what is taught in every decent manual on the economics of the EU. Moreover, it is easy to see how France and Germany might initially have benefitted from Greece's fiscal crisis. After all a cheaper € makes for more competitive exports.

What no one seems to focus a tremendous amount is on the merits of the Euro. First of all, the public and the commentators seem to have forgotten about all the exchange rate crises of the 1970s-1990s. Increased trade interdependencies expose EU member states to each other's bad governance, forcing to create arrangements to protect themselves from each other. The ERMs and the EMS were the first attempts at dealing with this issue, but proved incomplete at best, leading to the creation of the €. If the latter was to disappear, then we'd be back to the early 1990s.

Finally, speaking as a Portuguese and as a social scientist I must also admit that the euro also presents a welcomed pressure for necessary economic reform. By creating a tighter system of monitoring between the member states, it divulges more information about the quality of their performance. If for the € to work, it requires a strengthening of internal monitoring and if this increases the pressures for rationalisation of policy making and reform, then I can only conclude that the € is positive for its less efficient member states.

It seems that European integration happens through trial and error along a fairly clear integrationist path. As with any other polity, decision makers tweak and fine tune the machine. When each monetary mechanism failed after another, the argument for the € became more and more credible. Now that the consequences of the shortcomings of the Stability and Growth Pact have been brought to light, the structure will be kept with enhanced powers and institutional support, and my guess is that sooner rather than later there will be a certain amount of fiscal powers transferred to Brussels in order to fulfil the OCA.

On the USA though, by the standard of its time the country would not have been seen as any more homogenous than the Hapsburg Empire, with all its religions and languages (English, German, French). Moreover until the Civil War most Americans considered themselves first and foremost Virginians, New Yorkers, etc, and only after that Americans. Yet the dollar, fragile though it may have been, existed before the 1870s. The EU in that sense is not very different from the early USA or India, although we do not have a military threat as a catalyst for integration.

Before I conclude, I would like to add that the issue of labour mobility is limited first and foremost by language diversity. This however seems to be a decreasing problem as the vast majority of Europeans are now adopting English as their second language, thus making it the continent's "lingua Franca". This should solve the issue of labour mobility in the next 2 to 3 generations.

To conclude, just because the €zone is not an OCA, it is not automatically undesirable. Moreover just because it is now a second best option, it does not mean that it will not become a first best option in the future, as labour mobility will increase and as geographical automatic stabilizers will start to play a bigger role "

Upcoming EU Debates and Reforms

I'm going to do something everyone loves and no one is good at. I'm going to try to predict what the next big debates in the EU will be given what little information we have now. My logic is that future reform will follow the same path as previously and as such will be economic and intergovernmental crisis driven, with a bit of a functional institutionalist steering. I propose that two main policy areas will be discussed and that one major institutional issue will be raised. The first two refer to economic governance and to defence. The latter reffers to the possibility of a dual presidency of EU institutions under the same president.

1) POLICIES

a)Economic Governance: This is the perennial EU reform, caused by some ongoing crisis, and typically is path dependent, in that it is the latest step in European economic integration. Looking back at the Greek crisis which has spawned it, one is faced with the fact that this was almost inevitable. The geographical proximity of European countries and the transaction and transportation costs of the mid 20th century tie European countries to each other through trade, despite Political and security fears. These in turn motivate the ECSC(1951) and the CAP(1960), which then lead to the Common market. This increased level of integration increases intra-European trade, which leaves national producers more exposed to competition.unable to restrict access, national governments turn to artificially increasing competitiveness through exchange rate manipulation. This then causes a number of attempts from high productivity countries to control the others. Alternatively in order to avoid a race to the bottom in exchange rates countries decide to cooperate and coordinate their exchange rates. Independently of the mechanism, increased trade brings the need to coordinate exchange rates and so in 1979 is born the Exchange Rate Mechanism (ERM). Incidentally the main lines of EMU are first proposed a decade earlier in the Werner Report of 1969. From this and the subsequent imperfect agreements it is only a matter of time before those imperfections are made evident by speculative attacks. This, supported by enlargement, the profits that it brings and the impetus it gives to further integration and the countries adapt their interactive institutional framework, perfect the common market into the Single Market and inevitably implement the Euro. However this is still an imperfect setting and requires fiscal integration and delegation to give the monetary union more credibility and shield the member states from speculative attacks.

b)Defence: This is the latest in a number of articles which seem to me as though they indicate a certain willingness to move towards a much more integrated defence system for the EU. First I noticed Italy had been pushing for this (here's some more info), then obviously so did France, (and France again), as well as Germany (and again here). It seems natural. The USA is repositioning itself in light of the emergent powers in the East, looking at India and China as the next big partners/opponents in the geopolitical scene. It is also in decadence (not the one that makes your country disappear, but the one that makes it close a couple of military bases around the world and rethink cowboying around the world in the future.). So it must make some savings. Russia wont invade Europe, despite CEECs fears. Energetic disputes are mostly regional beyond the interest and influence of the USA. At the same the EU is very stable within itself, so the USA don't need to worry about developments here. It's not just that we are too many to deal with. Obama does not come to Europe because he doesn't need to.Thus the USA start pushing for a NATO which is less dependent on their own expenditure and ask us Europeans to share the bill. I don't like war and war-related business but this is an argument I have some difficulty arguing against.

However there is a more fundamental reason for the EU to integrate it's military organisations better, Economies of scale. Basically, as this article argues, and as should be apparent to anyone aware of the EU's non super power role, we spend almost 9 times as much as the Chinese in the military yet we get absolutely no value for money. The extent to which there must be duplication of efforts must be ridiculous for a block of countries who will never fight against each other again. Plus if we all get together, we are bigger, and as economics tells us, bigger markets bring higher levels of specialization which in turn creates higher efficiencies. This is a typical case of being able to get much much more for the same amount of money. Plus if integration in the defence sector takes place, the European defence market becomes a monopsony of procurement with all the advantages that creates for bargaining power for the EU and for all the specialization it creates in the supply side. The obvious downside to this is that we'll create a bigger and newer interest group with more nefarious interests. I mean the last thing we want is a militaristic Europe 100 years after the first world war. So maybe it should be so that this further step in defence integration should follow fiscal integration thus allowing the EU to buy a veto in the administration of war related businesses. In this sense the Germans and the French could sell their shares in the EADS to the EU. Either way something ought to be done to at least try to prevent this sort of development from taking place. After all, it would be a pity to have to continue to follow the USA's initiative. Wouldn't it be amazing if the next internet-like invention came from Europe rather than the USA? (and yes I know the first version of the web came from CERN...).

I don't know how long all of this will take, but it shouldn't be much longer. How long will largely depend on the UK and on the next period of persistent economic growth. The UK is the EU's largest spender on defence. Without it France would have to prop Germany up more than what it might like to. The UK would provide the necessary tie breaker. Finally in order to go through this process it is necessary to have two things: Democratic support and the economic resources to pay for it, so getting out of the crisis would help. It seems to me that the momentum is there. All that's missing is an opportunity.

2)Dual Presidency

Here and here are some discussions of the possibility and implications of merging the roles of the Council and of the Commission presidents. On the face of it, it is not a particularly bad idea. It would decrease the number of Mr/Mme Europe, which seems to have become a major embarrassment for post-Lisbon EU. But is it really such a good idea?

I am on the fence on this. I think that there's that argument in favour of it, but are the roles really compatible? The only example of this is the present situation of Lady Ashton. She's a servant to two masters: The commission of which she is a vice president and commissioner for foreign affairs, and the Council of which she is the president of the committee for foreign affairs and defence and security. How is she handling it? Well it's still a bit early to tell, but she's struggling. The problem to me seems to be that the Commission is an executive body, who is fairly political, and follows or leads the parliament, which is also political. The council however is intergovernmental. Might there be some conflict of interests? Not forcefully and actually this position could actually help put an end to the rivalry between the two institutions. But it would have to be well done... Whoever would be in charge would have to have a lot of staff. Though I would add that in good truth it seems to me as though the best arrangement would be the one where all council "committees" are modeled after the Commissariates and the European Parliament's committees so that the council's meetings are all presided over by the relavant comissioner. Finally, I do agree that at one point or another, the concentration of power will be such that the president of the EU position should either be made to be directly elected or so that the relevant politician must be a member of the lists of the majority party in the European parliament. Both would have political legitimacy, but the latter would do so with added simplicity. It would only require the addition of a small number of articles redefining the role of the president of the commission as closer to the role of the prime minister of a federation (say Merkel or the Prime minister of Canada, India or Australia), to ensure that the candidates would be apparent to everyone, thus forcing him/her to actively campaign. The fear here is that if there is no such transparency incentive, then we may end up with no apparent leader during the campaign, leading to the president being chosen ex-post in the corridors rather than ex-ante or during the voting, as is supposed to be the case.

So what do you think?

Greece will be bailed out before it defaults or restructures

So it seems that Greece will actually need to be bailed out. Wolfgang Munchau offers a good explanation of the underlying dynamics and mechanisms, while Jean Quatremer provides a more accessible version, for those who speak French. Its particularly relevant in terms of the accounting and maths of it all. Please read them if you have a chance. I must say I identify more with the optimistic perspective of M. Quatremer, in that Greece will be bailed out. I'm not saying it won't default. I'm just saying it will be bailed out and if that's not enough, then it will default. My hope for the bailout is that it will save Greece from falling further into a debt deflation dynamic such as the one described by Jacques Depla, which would then create real lasting problems. If this proves true, then we end up in Wolfgang Munchau's scenario number two, where the EU and the IMF bail out Greece. Contrarily to him I assume that member states can bail each other out, within the limits of some set out by article 103a of the Maastricht Treaty(in page 13), which reads as follows:

"ARTICLE 103 a 1. Without prejudice to any other procedures provided for in this Treaty, the Council may, acting unanimously on a proposal from the Commission, decide upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products. 2. Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council may, acting unanimously on a proposal from the Commission, grant, under certain conditions, Community financial assistance to the Member State concerned. Where the severe difficulties are caused by natural disasters, the Council shall act by qualified majority. The President of the Council shall inform the European Parliament of the decision taken."

Granted that all of Greece's problems are not motivated by "difficulties caused by exceptional occurences beyond it control", but they are partially. As long as it is possible to determine that an economic shock is not purely endogenous, this article allows for the intervention of the Council upon a unanimous decision of its members. Given that economics is not an exact science, and that we are unlikely to create a European Court of Macroeconomic Justice, it is fair to say that as long as an economic shock is symmetrical(meaning as long as everyone else is also experiencing a recession), those who are suffering less will always be able to bail out those suffering more, even if everyone is suffering.

I also disagree with Munchau on his last comment that "the message from the EU, and from Germany in particular, is that member states are not ready to co-ordinate economic policy in the short run, and move towards a minimally sufficient fiscal union in the long run, and that as a result EMU is doomed". To me this is a syllogism. I think that the EU is more than the sum of its parts, particularly in terms of institutional reform, which is what is relevant from the point of view of fiscal

Also, if common sense is not a good enough explanation for German self interest in dealing with its neighbours, here is a fairly comprehensive review of all the possible reasons why Germany does not want to offer Greece any outrageous bailout.

This is why we need European independent revenue, ie EU taxes. This way there will be another level of government whose preferences are the result of an aggregation of the preferences of the populations of all EU member states, weighted by the machanics of the European parliament's electoral system.

This way, the greeks won't complain about Germany. They'll complain about Europe. And if Europe does not help them with structural funds, they'll burn EU flags or vote for more leftist representatives in the EP, who will be more generous with how they spend EU funds.

On a final note, this issue of the bail out from the EU has been a controversial topic since the beginning of the financial crisis, before it expanded to the rest of the economy. There's an interesting distinction that must be made. States can, under some circumstances bail each other out, the ECB cannot. Both the member states and the ECB can bail out the private sector. The explanation for this can be found in Article 104 of the Maastricht Treaty:

"ARTICLE 104

1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’)in favour of Community institutions or bodies, central governments, regional, local orother public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

2. Paragraph 1 shall not apply to publicly-owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions."

So if you are wondering why people talk about the help that the ECB gave to businesses during the financial crisis, it did so through paragraph 2. It provided credid facilities to "private and publicly owned credit institutions." In conclusion, member states can bail eachother and their private sector out. The ECB can also bail out the private sector but not country. The ECB can increase its credit lines to private institutions all over the Euro-zone, which may then buy credit from the state. So in principle, the ECB could bail a state out. However, it is rather unlikely that the ECB will provide a credit line exclusively to one bank of a specific country, which would serve as a proxy of the state, as this would be highly frowned upon. Alternatively, it could provide that credit line to everybody, but it seems very unlikely that all those banks would then flock to a troubled country and just hand that money to it.

Government run Ponzi Schemes - Call the IMF!!

So, aside from the brief and recent comment posted yesterday, I haven't written much lately, which is good. It means I have a life. :) However, I think I ought to write something about this whole Greek mess, so as to at least have a reminder of these troubling times for the future. I have five comments about this mess:

First, why on earth is any country allowed to finance the payment of debt itself with more debt? Greece is (today) struggling to pay its debts, so it borrows to pay the debts. Why do markets even lend it the money, given the rather poor growth prospects that Greece is faced with?... It's likely that they have lent some money to Greece at lower interests in the past which now require more lending to get paid. Therefore the idea is that high interest yielding debts pay for low yielding debts. As long as lenders believe that Greece will pay, they keep on lending. So the risk really is to get to a point where Greece loses credibility, because then it will no longer be able to borrow. (this is a bit messy...). As a friend of mine reminded me, this cannot technically qualify as a Ponzi Scheme, because there are no asymmetries of information as the people purchasing Greek bonds are aware of the state of Greek finances and the implications. Indeed it is possible that the Greek government might be the one being defrauded…

Secondly, it is interesting to see the aggressive comments coming out of Greece, about German WWII reparation payments and about Anglo-Saxon media and financial conspiracies... It’s evident that the first two are political manoeuvres to confuse the electorate and shift the blame from the present government to other people. Nonetheless, I must say that the financial conspiracy does carry some weight. I’m not saying that there was any wrong doing. I’m just saying that there is enough evidence to make me believe that it would have been interesting to investigate whether there was collusion between the major lenders to Greece, the last time that it issued its debt. This idea is motivated by the fact that someone recently brought to my attention the fact that although the German bund spreads on Greek debt went up massively the last time they issued debt, the demand for it was massive. This would imply that lenders had estimated an increase in the risk of Greek defaults, but still found them to be attractive enough to want to purchase them. Because the Greek government really needed the money, its demand was rather flat, and inelastic. If there was collusion between the major financial players, then in real terms they would have behaved like a monopolist, supplying cash at an interest equal to their marginal revenue, not their marginal cost. So to go back to the beginning of this paragraph, I’m not saying that there was any wrong doing. I just think its natural to investigate whether the collusion that seems to have taken place was natural, tacit and logical or whether there was some type of explicit agreement between some of the financial actors. Both situations are possible, but only the first is legal.

Thirdly, it was interesting to read Eichengreen's article about why the Euro will not collapse, due to market arbitrage (ie: if Greece was to leave the Eurozone, firms would know that it would devalue its currency, and as such would move their assets abroad before this, so as to not have them devalued) and to practical concerns of paying machines and cash dispensers, as well as the cost and time of producing the new currency itself.

Fourthly, one thing that is becoming more talked about is the consequence of the default for other EU member states as the interdependencies in the EU financial sectors might mean that Greece defaulting on its debt would destroy the assets of some other member states financial institutions. (As illustrated in that article: This in turn would freeze lending in EU markets as markets once more become unable to distinguish between good assets and bad ones, as they did when Lehman fell. This might cause companies to go bankrupt, because they are dependent on some type of lending from the financial sector, and to consequently fire more people. Depending on the size of these interdependencies, we could either have a little glitch or another financial crisis on our hands. Lovely...

I must say that in light of all this, and particularly in light of the stupidity of some greek politicians it might actually be better to bring in the IMF. At least that way the Greeks will stop blaming other Europeans. Moreover I don't think Germany is in the mood to help a country where a government official says something like what the Greek deputy prime minister said and the government does nothing. (Actually I wouldn't be surprised if on the eve of a German led bail out, he would be fired or retire for “personal reasons”, that most political of euphemisms…) "Let the IMF let loose the Washington consensus dogs of war"

A less interesting situation, but one which takes me back to my Varieties of Capitalism days, is the understanding of why people are protesting in the streets of Athens. On this issue, there are two interesting paths to explore here. The first one is that Greece probably lacks a substantial export sector other than its shipyards (which is not little, but probably not overwhelming). This in relation to other insights on labour force reactions to economic policy and industrial relations makes me feel that the default position for labour is protest, not refrain. If it was, then Greek workers from exporting industries would protest against the protestors (for that sake the same would apply to Danish workers when Denmark joined the Deutschmark area). The other thing is that myopic self interest really is a strong force. I mean, Greece is really in a mess. If it does not tighten its belt, it will really have to default on interest payments of its debt. This would bring about a number of painful consequences, where the little business existing in Greece would leave, thus increasing unemployment, and decreasing wages, which is basically what the EU is asking Greece to do. The difference is that business would not leave if Greece did it without defaulting on its debt. However, public functionaries don't really seem to care much about that... I may sound cruel and cold, but the truth is that Greece has no alternative. One way or another it will have to decrease wages. The choice is between the process, ie whether it wants to be coerced into doing that by basic economic mechanisms or whether it decides to do so voluntarily.