Category Archives: Economics

Death of the Euro: Thinking the Unthinkable

Impakter Magazine just published my latest article, here it is:

BOOK REVIEW “THE EURO: HOW A COMMON CURRENCY THREATENS THE FUTURE OF EUROPE” BY JOSEPH. E. STIGLITZ (PUBLISHED BY W.W. NORTON & CO, AUGUST 16, 2016)

Nobel laureate Joseph Stiglitz’s latest literary effort, a new book about the travails of the Euro and Europe, published in August with the apt title “The Euro: How a Common Currency Threatens the Future of Europe” couldn’t land in the muddy European political waters at a more appropriate time.

The summer of 2016 was a turning point for the so-called “European Project” – Europe’s long-run attempt to build a United States of Europe that began with the 1957 Treaty of Rome setting up the European Economic Community (EEC) with six founding members (Germany, France, Italy, Belgium, the Netherlands and Luxemburg), and continued in 1993, with the Maastricht Treaty, the European Union (EU) with (up to now) 28 member countries.

 

Problems have piled up this summer, relentlessly.

The opening salvo came in June with the UK referendum that unexpectedly led to “Brexit”, the decision to leave the European Union with 17.4 million Brits voting in favor. For the first time since its foundation, the EU is expected not to expand but to contract, down to 27 members – probably by 2019, when UK exit negotiations will be completed.

 

The most recent problem came in October with another referendum, this time in Hungary, calling on the population to disregard EU policies on refugees and reject quota obligation to accommodate asylum seekers. The referendum did not break the 50% threshold and the result was therefore declared illegal, but it did demonstrate that once again, a hefty minority, 3.6 million Hungarians (43% of voters), supported their government’s continuing opposition to Brussels.

 
Against this background, Joseph Stiglitz’s book has special resonance.
 
As he convincingly argues, the Euro was supposed to bring the European project forward but it has done nothing of the kind – if anything, the European Project has suffered setbacks just as much outside as within the countries of the Eurozone, the 19 EU members who use the Euro as a common currency. Incidentally, this is not a minor currency: The 19 European countries together account for roughly 14 percent of world GNP, making it the third largest economy in the world, after the United States (20 percent) and China (18 percent).
 
Do not delude yourself into thinking this is not important for the rest of the world: should the Euro collapse, the shock would shake the whole world.
 
It could even start another Great Depression.

A SLOW DEATH

Stiglitz minces no words in roundly chastising European leaders for “muddling through” a succession of Euro crises, ever since the first Greek debt scandal broke out in 2010. The book is a convincing diagnosis of what went wrong and why successive “bailouts” of Greece (three so far) have failed miserably, leaving the country six years later with an inexorably rising debt and a Gross Domestic Product diminished by a quarter, while the exceptionally high unemployment (a mind-boggling 50% for the young) won’t budge – really as bad as a war. Stiglitz’ detailed description of the Greek case is harrowing. A must read for anyone who hasn’t followed the drama closely.

And he is equally convincing in arguing that Ireland, often promoted (mostly by Germans) as the “poster child” of the success of Europe’s monetary and austerity policies is no such thing. EU-imposed austerity measures “helped ensure that Ireland’s unemployment rate remained in double digits for five years, until the beginning of 2015, causing untold suffering for the Irish people and a world of lost opportunities that can never be regained.”

Tough words that apply equally well to the other “crisis countries” of the Eurozone. For example, Portugal, also promoted by the IMF as a “success”, is far from that: The facts are that “the government might be borrowing with more ease, but the Portuguese people never experienced a real recovery.” Indeed, across Europe, excessive reliance on austerity and monetary policy “has resulted in even greater inequality: the big winners are the wealthy, who own stocks and other assets […]; the big losers are the elderly who put their money in government bonds, only to see the interest rates generated virtually disappear.”

 

The reason for such a deplorable state of affairs?  

First, a misplaced belief in what another famous economist, Paul Krugman, calls the “confidence fairy”: the idea that with austerity and a balanced budget, business confidence will be restored, which overlooks the simple fact that when consumer demand is depressed, business has no incentive to invest. In a recession, the confidence fairy, as Krugman says, becomes a zombie.

 

To read the rest, click here

NOTE TO MY READERS: Stiglitz’s advice on how to fix the Euro is truly excellent, and I sincerely hope our political leaders will read this book and act on it. I’ve tried to focus on the policy measures that are really doable among the many ideas Stiglitz presents. Eminently practical, they would take VERY LITTLE EFFORT… if only Germany would stop focusing on stupid austerity policies that are destroying Europe!

Go over to Impakter to read about those policy measures and tell me what you think!

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Greece vs. Germany: A Game of Chicken Or Cat and Mouse?

Paul Krugman in the New York Times has called the rapidly unfolding Euro crisis a “game of chicken” (here). I think it’s more like a  cat-and-mouse game played by Germany against Greece, in which Germany is a Big Fat Cat trying to immobilize a darting Greek mouse.

As I explained in my previous blog post, the Greek Prime Minister Alexis Tsipras and his Finance Minister, Varoufakis, started by refusing to talk to the “troika” (European Central Bank, International Monetary Fund and European Commission) and traveling all over Europe to raise support for a renegotiation of the bailout that has caused so much suffering in Greece – from unbearably high unemployment (over 40%) to a collapse of the national health system and a 25% shrinking of the economy.

Yes, a darting mouse.

Next, last Wednesday (4 February) , the European Central Bank (ECB) made the first move,  announcing that it would no longer accept Greek government debt as collateral for loans. And the announcement came just before Varoufakis, the Greek Finance Minister, was to visit the ECB President, Mario Draghi.

Mr. Krugman did not see this as a serious move. Yet, it means further pains to the Greek banking system that is already suffering from a run that began last week with Syriza’s victory. No surprise there: wealthy Greeks are all taking their deposits out and with the click of a button sending them to Frankfurt or London.

When that happens, it is in principle the role of the ECB to provide liquidity to the affected banking system and this is normally done by accepting national bonds as collateral,  at a very low cost. Mr. Krugman sees the ECB decision as merely one step in the on-going negotiations – a warning signal that doesn’t substantially change Greece’s situation since it can still have recourse to an ECB special loan program designed to support banks, called Emergency Liquidity Assistance (ELA). That’s true but the trouble is that it’s much more expensive, about three times as much.

Then, the next bomb exploded: on 6 February, one of the world’s three major rating agencies, Standard & Poor’s, downgraded Greece’s rating from B to B-, practically junk.

The upshot? To raise funds, Greece will now face higher costs on international capital markets.

The reasons given for the downgrade – liquidity constraints on the banking system and prolongation of talks with official creditors for a revised bailout deal –  come as no surprise.  As Standard & Poor’s put it:

In our view, a prolongation of talks with official creditors could also lead to further pressure on financial stability in the form of deposit withdrawals and, in a worst-case scenario, the imposition of capital controls and a loss of access to lender-of-last-resort financing, potentially resulting in Greece’s exclusion from the Economic and Monetary Union.

Needless to say, the Tsipras-Varoufakis travels did not yield the expected returns. Even Italy’s Prime Minister, Matteo Renzi, abandoned the Greek cause, siding with Merkel – alleging the Italian banking system held €40 billion in Greek debt.

The Greeks are taking it well (so far) saying they’ve got sufficient sources of financing.Varoufakis, upon his return, exhibited his usual self-assurance, saying that he had “logic” on his side.

Logic? Yes, if Europe, with its continued demands for austerity, pushes Greece too far against the wall, there won’t be any reason for it to stay in the Euro. In particular, if the ECB doesn’t act as a lender of last resort to Greek banks, why should Greece continue with the Euro? A collapse of the banking system has always been identified as the first thing that would happen to any Euro-zone member leaving the Euro. But if it is already collapsing, why stay in?

I know, for years, I have blogged about the Euro crisis, taking the position that a Grexit (exit of Greece from the Euro) was impossible. Now, I believe it’s entirely possible. The main reason for believing that a Grexit would never happen used to be the so-called “domino effect”: if Greece left, the next in line would be all the Southern European States suffering from the same debt overload and faced with the same urgent need to reform, i.e. Spain, Portugal, Ireland and Italy. This was such a huge chunk of the Eurozone that it would have caused an avalanche, burying the Euro.

But now something is changed: starting in March, the ECB will be able to engage in Quantitative Easing (QE), on the model of the Federal Reserve – something it has never done before because the Germans, fearful as always of any growth in sovereign debt, had prevented it. But now, the German red light has turned yellow, and QE is no longer out – indeed, it is in.

This means that if Greece exits the Eurozone, the ECB has the power to stabilize the currency through QE. And Greece is a small part of the game: its GNP is about 2.5% of the total Euro-zone. The ECB surely has now the firepower to handle a Grexit.

So, the outcome could really be a Grexit…Your opinion? Do we want Greece out of Europe? If it goes back to the Drachma, it will find new friends to help its finances: Russia and China – perhaps even Turkey (in spite of historic dislikes…) How will Europeans feel when Greek ports on the Mediterranean are run by the Chinese? When Greek banks recycle Russian money? Where is European solidarity and the dream of a United Europe?

Ask the Germans…

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