Bailing out Greece: A great business deal!!

This note was posted as a comment on the FT, Brussels Blog at http://blogs.ft.com/brusselsblog/2010/05/mother-of-all-rescue-plans-buys-europe-time-but-can-it-work/#comments:

"Germany is all “abuzzing” about the costs of bailing out “lazy” Greeks. But how much did it cost Germany to bail out Greece? Well apparently letting Greece scare the markets and then bailing it out is a good business model. As it turns out, Germany made at least a €8.6Bn profit off it. May be even as much as €25.4Bn. How? Let’s see:

The cost of bailing out Greece was €22.4 Bn over 3 years, according to Der Spiegel. (http://www.spiegel.de/international/europe/0,1518,693579,00.html)

However this saved German banks from a balance sheet hole of as much as €33Bn, due to their exposure to Greek sovereign debt. (http://www.spiegel.de/international/europe/0,1518,693579,00.html)

It also turns out that a weak Euro, caused by Greek fiscal profligacy probably helped German exports. It is hard to say by how much, but given that exports had grown by 1% on average over the last year or so, and that they grew by 21% in March, I have generously considered that 14.81Bn out of the total 85.6Bn of German Export may have been caused by the low value of the Euro. (http://www.ft.com/cms/s/0/f6e35528-5c1f-11df-95f9-00144feab49a.html ) Finally it seems that the DAXX regained all the losses it incurred last week. (http://markets.ft.com/ft/tearsheets/performance.asp?s=569857&ss=WSODIssue)

So I propose two estimates of the German economic profit from rescuing Greece:

If you think that my estimated effect of the low Euro is exaggerated, which it probably is, then at worse, the bail out saved German banks from incurring those losses. As such Germany made an economic profit of as much as €8.6Bn from saving Greece.

None the less the low value of the Euro must have had some impact on Germany’s. Although the effect might not have been as high as to account for a whole €14.8 Bn worth of added exports, I guess one could establish that as a decent ceiling of how good the devalued Euro might have been for Germany. If that’s so, then we have to accept that Germany might have made a total of up to €25.4Bn from rescuing Greece.

Not such a bad deal after all… "

uau!! €500Bn is a lot of money!!

As Jean Quatremer (notice the reference to the IMF) of Liberation writes the Eu revolutionized itself last night, by creating the puffiest safety cushion on earth:

Markets rally on €750bn EU bail-out - FT

EU Crafts $962 Billion Show of Force to Halt Crisis - Bloomberg

EU Turns to 'Nuclear Option' to Halt Euro Speculation - Der Spiegel

“Mother of all rescue plans” buys Europe time - but can it work? - Tony Barber from Brussels Blog at the FT

Wolfgang Muchau of the FT joins his colleague on a gloomy analysis of the Fiscal package. He makes two interesting points. One about fiscal union and another about national economic reform:

On the first he says that "this deal is going to be ineffective beyond the very short term, unless it is followed up by substantive reforms – the introduction of a single European bond, an agenda to co-ordinate economic reforms with specific relevance for the monetary union, policies to reduce economic imbalances, much tighter supervision of fiscal policies that kick in well before budgets have already been announced, and, in my view also a kernel of a fiscal union – in essence all the things over which the EU has been, and still is, in denial."

I guess I must take issue with this. It As I have shown in this post, there is already a single European Bond, which has existed in theory since 1988. The ECOFIN already is a forum for coordinating economic reforms, and it is expected to be revamped by the commissions' proposals to be presented in two days. This will probably see the implementation of tighter supervision.

I agree that this is not tantamount to fiscal Union, but it leads the way for it, under enhanced cooperation.

Regarding to economic reform, Mr Munchau says that "the private sector [in Portugal is and in Spain ]massively indebted. The prices of assets that serve as collateral are still falling. The Spanish government, as guarantor of the banking sector, will be lumbered with rising debts at a time of stagnating economic growth. We should remember that solvency is not primarily related to financial markets’ willingness to lend. That’s liquidity. You are solvent when you can stabilise your debt as a proportion of income. Southern Europe’s solvency position is thus unaffected by the billions."

Here I must agree with it, but according to the general argument this is a problem intrinsic to the Eurozone. Because there is only one interest rate for all 16 countries, it cannot effectively target everyone. As a result the rates are too low to contain inflation in Portugal and Spain and too high for Germany and the Benelux. However there's a problem with this argument, it completely disregards the fact, that banks as intermediators should price debt better than they do in Portugal and Spain. Just because they can borrow cheaply, it does not mean that they cannot lend more expensively. My guess is that this has been possible in Portugal because a lot of people were guaranteed to pay their debts because so many people work for the state. In Spain the mechanism must have had something to do with the economic growth and the real estate boom. However this conjuncture has been changed and with the reforms to be implemented, it should change even more. As unemployment increases, as civil servants' salaries are frozen and as other such austerity measures are implemented (please stop hiring new civil servants!!) banks should start to price risk at a higher rate and thus the cost of borrowing should increase, thus increasing the rate of savings in countries like Portugal and Spain. More over it should also force them to move their money abroad, to less risky investments. This is of course if publicly owned banks don't loan at lower rates than those of the market for political and electoral reasons. The hope is that this won't lead to a debt deflationary crisis.

Before I go though, here's the council communiqué from last night about the fund/Financial Stability Facility in question. As you can see it is sparse on details and qualitative clarity. It is very clear quantitatively though!

What do you think?

The European Commission can Contract Debt on behalf of the whole of the EU!!

I am godsmacked by my own ignorance! I had no idea about this but apparently the European Commission has been able to contract debt on behalf of all of its member states since 1988. This is heavily regulated, but has been brought forward as a reform channel now that the EU needs to set up an emergency fund to calm down the markets.

I came across it on this article by Mr Anthony Barber from the FT.

After researching a bit, these are the relevant sources that I found:

The relevant press release, which among other things gives info on the debt:

"The EC has carried out three euro bond issues since last year to finance a first instalment of €2 billion for Hungary (disbursed early December 2008), a second instalment also to Hungary and also of €2 billion (disbursed late March) as well as a first instalment of €1 billion to Latvia (paid in February). The last issue, placed on 17 March and due on 7 November 2014 (5-year maturity), was priced 3.25%."(implemented to help Hungary and Latvia).

Council Regulation (EC) No 332/2002 of 18 February 2002 reforming the original 1988 regulation, forbiding its application to the Eurozone countries but allowing its use to non €zone countries. Also extending the fund to 25 Billion.

The original Council Regulation (EEC) No 1969/88 of 24 June 1988 establishing a single facility providing medium-term financial assistance for Member States' balances of payments.

More details on the implications soon to come, but for the time being I can think of this:

If the finance ministers intend to use this debt facility as a channel for dealing with and calming debt markets, then they will face 1 obvious hurdle and 2 potential problems. The obvious problem is that the regulation is very clear. This debt facility only applies to NON EUROZONE countries. At the very least they will have to pass another regulation by the end of the night in order to get it to also apply to Eurozone countries. Then there's the fact that I haven't et checked whether there's anything written about it in the Maastricht, Amsterdam, Nice or Lisbon treaty, that also specifies the scope of this regulation. If so it is an enormous problem, tantamount to requiring EU constitutional reform, which takes ages. Finally it is possible that the ECB may play a role in this and as such it would be interesting to see what obstacles it would pose to the expansion of this subreptitious European Monetary/Debt Fund.

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 "

Readings on the Debt and EU-USA integration

Friday - 07/05/2010

Some interesting readings from www.VOXEU.org:

"Greece, Portugal and Spain: Lessons from Argentina", by Domingo Cavallo, Joaquín Cottani

"What will happen if Greece defaults? Insights from theory and reality", by Eduardo Borensztein, Ugo Panizza

"Untapping the EU-US trade potential: Taking the Transatlantic Economic Council forward", by Lucian Cernat, Bertin Martens -----

Debt markets in the next two weeks

This article is extremely insightful. However I must disagree with the analogy between Greece and Bear Stearns. This is inappropriate because Greece is getting bailed out, Bear Stearns wasn’t. If anything Greece should be compared to Morgan Stanley who was bailed out.

Moreover, the contagion to Portugal, Spain, Ireland and Italy is similar but on a much smaller scale. When Bear Stern filed for bankruptcy, the devastation was enormous because suddenly reputation was worthless. Therefore markets were unable to know who was in a good financial position and who wasn’t. Bad money crowded out good money which almost brought trading to a halt. In the present situation however markets know that Northern Europe’s credit is good. The doubt is as to whether all of Southern Europe is worse off than its northern neighbours and if so by how much.

Thus reactions are probably extremely exaggerated. Greece cooked its books for some years until it was impossible to hide the mess any longer. Portugal, Spain, Ireland and Italy for all we know have been honest in their reporting. Now of course no one is in a great place right now. Portugal has a private debt to GDP ration above 200% and requires some very fundamental changes in the way its economy works. Spain is going through 20% unemployment rates. Ireland has the EU’s largest deficit this year. So the fundamentals are not quite there, and in the long run it is both predictable and good that the financial markets are putting some pressure on these countries to fix their economies.

I would venture the guess that asymmetries of information between the governments and their lenders are causing the latter to exaggerate the extent of risk that they are exposed to. They are also increasing the effect of rumours and gossip in trading, such as Morgan Stanley's Joachim Fels' argument that the Euro-area is at risk. If this is the case, then things should either get much better or much worse for Portugal, Spain and Italy in the next 2 weeks. On May 12 data pertaining to the first quarter of 2010 about the national accounts of Portugal and the preliminary Italian and Spanish GDP values will be published. On May 19, the Spanish national accounts data will be published and the next day Italy will publish its latest industrial turnover figures.

The dissemination of this information should decrease the asymmetries of information and give a better idea of how solvent these countries are. Of course whether the new data will be favourable to the reporting nations is completely unknown. If it is, sovereign debt yields should shrink. If isn’t, then there might be yet another run on their debts and on the Euro. If the latter occurs, I would expect the ECB to start purchasing national debt on the secondary market in order to limit contagion. This should lower the prices of national debt, while maintaining some institutional pressure on EU member states to reform. All that the ECB has to do is to warn that in the absence of reform it will dump suspicious sovereign debt on the markets, causing a fairly predictable increase in their price.

Until then the markets should continue to behave a bit nervously, at least for another week, unless something new happens, like some oil shock, a or some freak revolution in Greece. Moreover, they will probably go a bit bonkers with the fact that there wont be a clear cut majority in Westminster. The Greek parliament could fail to approve EU/IMF assistance, or the upcoming summit of the council leaders could be either very successful or very unsuccessful in drafting plans for dealing with fiscal problems and reforming the Stability and Growth Pact (Hopefully they'll come up with decent plans for the EMF rather than for an actual European rating agency). Finally some rating agency might downgrade one of these countries yet again. What do you think?

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.

Prejudice, and how we tax those different to us

Here and here you can find articles that in my opinion are a perfect example of how prejudiced people are inwards looking. This is a Portuguese report on a Bishop from the Canary Islands who is trying to defend the catholic church in light of the fact that a lot of its priests have been found guilty of pedophilia. Here's everything else that he's said in the past.

The article basically reads as follows:

"The Bishop of Tenerife, Bernardo Alvarez, the highest religious authority in this region of Spain stated in an interview with local daily La Opinion that "there are minors who wish to be abused and who incite it.

The religious man did not stop there and created scandal by asking 'Why is an abuser of children considered sick? ". "There may be youths who consent – and indeed there are some' he said, referring to the abuses

"There are 13 year old teenagers who are perfectly ok with it and who even desire it. Incidentally, if you are not careful, they’ll provoke you '. These were the statements that the bishop Bernardo Alvarez made to answer a question about the pedophilia scandals that have caused a crisis in the upper echelons of the church and has called into question the procedures of Pope Benedict XVI on the subject.

Later on the bishop likened homosexuality with the abuse, and while ensuring that there is a clear difference between the two questions he did ask: 'Why is the abuser of minors is considered sick? ". As for his views on homosexuality, Alvarez stated that he respected that sexual condition, only to immediately after state that 'the phenomenon of homosexuality is something that harms people and society. "

For the bishop today "it is not politically correct to say that it is an illness, a defect, a deformation of the very nature of the human being. That's what any dictionary of psychiatry used to say and now cannot say. " For Alvarez, it is necessary "to promote education and inculcate the values of femininity and masculinity."

Obviously I completely disagree with any of this. Paedophilia is not the same thing as Homosexuality, and that anyone would argue it is highly ignorant. Although not necessarily the best scientific source, wikipedia provides some idea that there are around 2% - 20% homosexuals in most countries. It's hard to tell, because it not possible to know whether those who have had homosexual experiences are as homosexual as the ones who report having them on a regular base. They could either be curious heterosexual men or closeted homosexuals. This is not an urge, a temporary thing, or a choice (if it is a choice then they are bisexual). This is a continuing characteristic where men and women are attracted to individuals of the same gender, and have romantic and consensual sexual relations with them .

Paedophiles are individuals who for all I can tell experience an attraction for teenagers, children and in some cases babies, of either gender. I am not aware as to whether this is something that is environmental or something that can be fought and treated, or whether it is an attraction that is experienced with the same regularity as in straight and homosexual men and women. However, paedophilia, whether it is consenting or not is illegal for the simple reason that children are not considered to be mature enough to be able to make that decision for themselves because they are too young. It is considered to be a damaging experience for them to have sexual intercourse with an older person. I remember being 13 and having some pretty horny fellow students of either gender and none were so freaky that they had sex with an adult. At best it was with each other. More often than not they were bragging... You may dislike this argument. You may find it to advocate a paternalistic view of the state. I agree. It does take that position. On the other hand I am coherent. I do believe that the state has the responsibility to defend all those of its citizens who are most exposed to being taken advantage of. It should protect the unemployed, children's, the disabled's, ethnic minorities',the elderly and animals' positive and negative rights, with obvious limitations to freedom of choice .

The idea that some children may provoke sexual abuse can only make any sense in the mouth of a sexually repressed man or woman. The idea that homosexuality can be put in the same box as paedophilia is incoherent in light of these logical facts. Normality is one thing. Yes in any of our societies homosexuality cannot be said to be "normal" because it is not the "norm" or the majority observation (the mode). Yet when comparing homosexuality over the range of all the countries, it is a phenomenon that breaks national, racial, economic, religious and cultural barriers. Moreover it is not a recent phenomenon nor one that can be erased or purified (like the nazis tried), in that it is not hereditary. If it was it wouldn't be, it would have been, because evolution would have taken good care of it after a generation. It is present everywhere, and thus it is a normal phenomenon. Most important it harms nobody! It is consensual sex! CONSENSUAL!

There is no reason to opress homosexuality other than some ridiculous perception of collective identity that is tainted by the presence of a single deviation. Trust me I have my collective identity. I even have two overlapping ones: a Portuguese and a European one. Yet it affects none to know that there are gay men in either place. It would however affect it if I had been born 50 years ago, in a society where homosexuality was a crime and where paedophilia was hidden, as a necessarily tolerated embarassment, rather than a traumatising and alienating crime.

So what do we learn from this?

The american economist George Akerlof has written extensively on the topic of identities (Here and Here are some examples). His logic is that collectives of individuals create collective identities and that these identities have a tendency to be strictly enforced by the members at great pains to those who wish to not abide by them. I remmember talking to a friend of mine from Albania, who mentioned the fact that he was a muslim (of liberal taste). For some reason it hit me that although it was further from the centre of the Ottoman empire, Albania had converted to that empire's religion whereas Greece had not, despite being much closer. This seemed a paradox to which my friend expressed a simple and unassuming solution. "The Turks taxed all those who were not muslims. The Greeks could afford the tax. We couldn't!" and so in time they all converted. This is basically what Akerlof argues and what this pretty little "tree graph" describes in game theoretical terms:

The only problem here is to determine why it is that groups behave this way. I don't really know why, but I wonder if it is not something akin to an evolutionay social phenomenon caused by the dynamics of collective action problems. My idea is that although all the dynamics may escape the understanding of groups, the general rule of Mancur Olson's collective action problems hold, ie that you need homogeneity in a group for it to be successful. Therefore, it is very possible that heterogeneous groups that did not possess the appropriate institutions (representative democracy with free frequent and fair elections with a stable electoral system and with suficient but not cumbersome checks and balances all of which are compatible with the social distribution of preferences) were unable to survive their encounters with rival homogenous, coherent and well funded groups in the past. Could Athens or Rome, both of whom had too many voices be examples of this? Could that partially have been their problem? Could Feudalism and its demise fit into this as well? Does this type of logic help us to understand the counter-reformation of the Catholic Church? Either way I think it may be an interesting mix to try to understand what the evolutionary equilibria are when one mixes Akerlof collective identity framework with the insights from collective action problems. Not withstanding all of this, I would also add one comment to figure one. I believe that an interesting extension of the comments made by Akerlof and his colleagues is that the ability to alienate is a characteristic of any individual, and one which is necessary for the survival of groups who require its members to alienate those who don't follow the rules. This would be an interesting insight for me into human nature.

EMF, German economy and EU procurement reform

In the following article, Tony barber of the FT asks Two questions. First, whether it is possible for Germany to

: 1) "no longer to be, in the broadest sense of the term, the EU’s paymaster", 2) "impose strict budget deficits in the Eurozone" 3)"remain the EU’s champion exporter and a model of business competitiveness, piling up vast current surpluses as a result"

and secondly, whether this is compatible with European (Economic, I assume) Stability.

Regarding the first question, I believe that this is a coherently proposed set of goals. Again, I go back to the basic open economics: Y=C+I+G+NX, and Y=C+S+T implies that I-S + X-M = T-G. Therefore it is not just possible, but in the absence of a short term disequilibrium between Investment and Savings, if Germany wants to be a big exporter it needs to have a low deficit. What better way to do that than to stop being the EU "paymaster". But is it really the pay master?

Now, the second question is much more tricky. As I said, I'm assuming that he is referring to economic stability. Now the thing one needs to keep in mind is the EU's procurement system. At the moment EU revenue has 4 main sources: VAT, customs and agricultural duties and direct country contributions, based on some GNP proportionality formula. Then there are some other smaller adhoc contributions, but nothing more tha 5-10%. This means that whoever consumes more, whoever participates in more external trade, and whoever has the largest GNP, will always be the EU's paymaster. So Germany is stuck. Even if the EU was to levy some income tax, it would still be germans paying the largest piece of the cake.

Ultimately the point is still that the whole story is a bit inflated. There is no problem with Germany not wanting to pay for greek debt. Moreover, just because it decides that the idea of a EMF is good because it spreads the monetary cost of rescue to everyone, it does not mean that suddenly Germany wants to decrease the bill it pays. I guess it only means it does not want it to increase! Germany is the biggest payer of EU but it is not the majority. It's not worth making a fuss