Brett Romero

Data Inspired Insights

Tag: greece

Greece Crisis – Update

July 14, 2015 / / 0 Comments

Update #2 – July 14, 2015

  • After the comprehensive win for the ‘NO’ campaign in the Greek referendum, negotiations reopened between the Greek government and the institutions. One notable difference this time around was the distancing of the IMF from the process, as Greece has technically already defaulted on their IMF debt.
  • Despite a ‘NO’ vote being sold in Greece as strengthening their hand in negotiations, the people negotiating on behalf of the institutions were not buying this line. What quickly became clear was that even if Greece completely capitulated and accepted the terms of the reform package offered pre-referendum, that would no longer be enough for a deal. The most commonly cited reason for the hardened stance was that the institutions no longer trusted the Greek government to undertake the reforms it was signing up to.
  • During the week, it began to look increasingly likely that no deal would be made. At one point, every country in the shared currency zone except France and Cyprus was pushing for a Greek exit ahead of the final discussion to take place on Sunday night.
  • After marathon negotiations, on Monday morning (13 July 2015), it appeared a deal had been reached. This deal is more or less the reform package demanded before the election (raising the pension age, raising the rate of VAT and other changes), but with one key addition. Greece will now be forced to place 50 billion euros worth of state owned assets into a fund. The fund will be managed by KfW, a German government owned development bank where German Finance Minister Wolfgang Schäuble is Chairman of the Board. Despite the apparent conflicts of interest, this setup is designed to allow the creditors to sell off those assets to pay off debt.
  • The deal has been been met with dismay by most people in Greece (and many observers). Immediately after the deal was announced, the number one trending hashtag worldwide was #ThisIsACoup.
  • The final hurdle at this stage is Greek Prime Minister Alexis Tsipras passing the needed reforms through the Greek parliament. Many members of his own party have already vowed to vote against the reforms. However, it is expected that with assistance from the other major parties, passage should be possible.
  • New elections are expected after the complete capitulation by Tsipras. Despite the apparent failure, many Greeks are behind their government, arguing that they at least made an honest attempt to improve the situation. However, once the new austerity measures are passed, the harsh reality is sure to hurt Syriza’s popularity. The tragedy of the situation is that it was a thinly veiled intention of European leaders to remove Syriza from power by humiliating the Greek people, and they look likely to succeed.

One interesting revelation that has come out in recent days is in relation to German Finance Minister Wolfgang Schäuble. What has become clear is that he has favored the path of forcing Greece out of the Eurozone entirely since at least 2012. Revelations from the 2014 memoir of US Treasury Secretary Timothy Geithner, Stress Test, have recently surfaced about a meeting in 2012 with Schäuble (emphasis mine):

“A few days later, I flew to meet Wolfgang Schäuble for lunch during his vacation at a resort in Sylt, a North Sea island known as Germany’s Martha’s Vineyard. Schäuble was engaging, but I left Sylt feeling more worried than ever. He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks. At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall. I found the argument terrifying,”

This insight into Schäuble’s thinking reveals the core issue at the heart of the shared currency zone –  Germany’s economic dominance. The Euro is essentially the new Deutschmark and this has a lot of side effects. Southern European nations benefit from being able to borrow at cheaper rates than they have historically, allowing governments to upgrade infrastructure and provide a stronger social safety net for their people. As it has turned out though, they also spent a lot of borrowed money on things that made them less competitive economically, such as large public sector salaries and very generous pension schemes.

Germany on the other hand benefits from having the Euro weighed down by those nations, making German exports extremely competitive internationally. It also benefits from the increased wealth of those southern European nations (even though it turned out to be mostly debt financed) who could spend more money on artificially cheap German exports.

Everyone was happy with the arrangement when things were going well, but when the crisis hit, the underlying inequalities were exposed. And despite the complex nature of the monetary union, there are only two basic ways the underlying structural issues in the shared currency zone can be resolved:

  1. Germany agrees to permanent and ongoing wealth transfers to the less efficient European nations in the same way richer states in the US subsidize poorer ones.
  2. Germany forces the rest of Europe to become more like Germany.

It is obvious which option appeals more to German politicians – convincing Germans to hand over their taxes to what they largely see as their lazy, poorly run neighbors is basically a non-starter.

Option 2 is more or less what has been happening and the results are clear – it caused huge economic disruption in those countries, particularly as the reforms were implemented during times of economic turmoil. But there is a fundamental question of democracy at play here. Obviously Greece (and to a lesser extent the rest of southern Europe) was not doing a particularly good job of managing its own economy. The question is are we OK with a world where unelected figures can force economic reforms on a country – even if they are beneficial in the long run – directly against the will of the people?

I will leave the final quote to Arnulf Baring, a German author and historian (amongst other things), who was strongly opposed to the introduction of the Euro. In his 1997 book, Scheitert Deutschland? (Does Germany Fail?), he made the following amazingly accurate prediction about the future of the Eurozone:

“They [populistic media and politicians] will say that we are subsidizing scroungers, lazing on mediterranean beaches. Monetary union, in the end, will result in a giant blackmailing operation. When we Germans demand monetary discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More, they will perceive us as a kind of economic policeman. We risk again becoming the most hated people in Europe.”

 

Update #1 – July 4, 2015

  • The latest polling on the referendum is showing that it is too close to call. Both sides are polling approximately 43% with about 14% of Greeks undecided as to which way they will vote.
  • Friday saw rallies in Athens for both campaigns ahead of a campaign free day on Saturday. Both had huge attendances but as one observer described: “[The] ‘NO’ rally is pure passion trying to look formal. ‘YES’ rally is something formal trying to look passionate.”
  • The Greek finance minister Yanis Varoufakis has declared that he would rather cut his arm off than accept a further bailout. Varoufakis confirmed Syriza would agree to the conditions of the bailout, should the ‘Yes’ campaign prevail, but also pledged to step down if this occurred.
  • The IMF on Thursday released a review of Greece’s debt, which many in the ‘No’ campaign are taking as a big win, given that the report includes an admission that Greece’s current debt is unsustainable. The report also revealed the ongoing disagreement between the IMF and Brussels regarding the best way forward for Greece. In apparent confirmation of the damage these revelations could cause, Eurozone countries are reported to have attempted to halt the release of the document before the referendum.

Original Piece – July 2, 2015

The debt crisis in Greece has been evolving quickly over the past few days, with several interesting developments. If this is the first you have heard about it or you haven’t been following the issue closely, I strongly recommend going back and starting here. For those that are up to date, here are the key updates so far this week:

  1. The European Central Bank (ECB) has not cut off emergency funding to banks in Greece as it was feared it might, but has decided against raising the amount of funding it will provide. The main story here is the banking sector in Greece avoids an immediate collapse and Greece will be able to survive until the referendum this weekend. But, by not raising the amount of funding, they have put Greek banks in a position where, if they ran in business-as-usual mode, they would not be able to keep up with the demand for Euro’s and would run out of cash.
  2. As a result, the Greek government has imposed capital controls and declared a bank holiday for this week. Banks will not open (with an exception for pensioners on Thursday) and people will only be able to take out 60 euros a day from ATMs. This is to ensure banks in Greece can stay viable until the referendum.
  3. In terms of the referendum, the expected result is unclear at this point. The latest polling is showing the ‘No’ (OXI) vote is ahead with 55% planning to vote ‘No’ to accepting the bailout under the current conditions, with only 33% planning to vote ‘Yes’ (NAI). But the gap has been closing as the situation has deteriorated. This picture contrasts with betting markets (yep, you can pretty much bet on anything) currently indicating a 66% chance of a ‘Yes’ vote.
  4. In the meantime, the Greek Prime Minister Alexis Tsipras has been campaigning strongly for a ‘No’ vote in the referendum. Tsipras is not out there on his own though. Two Nobel Laureates in Economics in Paul Krugman and Joseph Stiglitz have expressed their support for Syria’s decision and a ‘No’ vote, also adding a good helping of criticism for the role the creditors have played in getting to this point.
  5. However, in the meantime Syriza have still been attempting to continue negotiations with the creditors and yesterday (Wednesday) made further concessions in order to try to secure a deal.  The concessions made were agreeing to certain cuts to pensions (despite what you might have heard, the creditors are demanding further cuts) but on a delayed schedule, and agreeing to most of the VAT increases but maintaining an exemption for the islands. It should be noted that any deal reached at this point would not cancel the referendum, but would cause Syriza to reverse their current course and start campaigning for a ‘Yes’ vote.
  6. The creditors have basically slammed the door on further negotiations though, indicating that no further negotiations are possible before the referendum. This move is widely perceived as Europe calling Syriza’s bluff, but there is probably more to it than that. There have been further claims that no new deal is possible at all while Syriza remains in power. Indications are that regardless of the outcome of the referendum, the Eurozone will continue attempts to force new elections in Greece. Of course, this overlooks the fact that the only reason a marginal party like Syriza got into power in the first place was due to the extreme austerity forced upon Greece, but whatever. For outside observers, no matter what you think about who is to blame for this crisis, the completely undisguised attempts by Europe to destroy a democratically elected government because they don’t like their politics should make you very angry.
  7. Finally, based on the reaction from bond and equity markets this week, the financial contagion from a collapse in the Greek economy would appear to be limited. That said, the political contagion could live on for a long time. The behavior (see point above) of the institutions (and the people heading them) that are supposed to be run for the benefit of all Europeans has revealed how politicized they have become. Even in the scenario where Greece somehow stays in the Eurozone, significant damage has been done to the European project and to the goodwill that existed for it. If you haven’t already, I highly recommend reading Alexis Andreou’s fantastic insight into how a lot of young Europeans are likely to be feeling.

The situation is changing fairly rapidly at the moment, so I will continue to add updates here as things change.

Piketty Takes A Swing at Germany

July 8, 2015 / / 0 Comments

Thomas Piketty, a French economist who found fame through his book Capital in the Twenty-First Century, recently conducted an interview with German magazine Die Zeit. After being translated, the transcript of the interview went viral with quotes showing up in the front pages of news sites all over the world. And for good reason, Piketty pulls no punches in his view of the crisis and the stupidity of ignoring the lessons of the past… again. This should be mandatory reading for anyone commenting on the crisis.

This version of the interview, which was originally in German, was translated by Gavin Schalliol. He has now taken down the translation while he sorts out copyright issues. Here is the full text:

DIE ZEIT: Should we Germans be happy that even the French government is aligned with the German dogma of austerity?

Thomas Piketty: Absolutely not. This is neither a reason for France, nor Germany, and especially not for Europe, to be happy. I am much more afraid that the conservatives, especially in Germany, are about to destroy Europe and the European idea, all because of their shocking ignorance of history.

ZEIT: But we Germans have already reckoned with our own history.

Piketty: But not when it comes to repaying debts! Germany’s past, in this respect, should be of great significance to today’s Germans. Look at the history of national debt: Great Britain, Germany, and France were all once in the situation of today’s Greece, and in fact had been far more indebted. The first lesson that we can take from the history of government debt is that we are not facing a brand new problem. There have been many ways to repay debts, and not just one, which is what Berlin and Paris would have the Greeks believe.

ZEIT: But shouldn’t they repay their debts?

Piketty: My book recounts the history of income and wealth, including that of nations. What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.

ZEIT: But surely we can’t draw the conclusion that we can do no better today?

Piketty: When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.

ZEIT: Are you trying to depict states that don’t pay back their debts as winners?

Piketty: Germany is just such a state. But wait: history shows us two ways for an indebted state to leave delinquency. One was demonstrated by the British Empire in the 19th century after its expensive wars with Napoleon. It is the slow method that is now being recommended to Greece. The Empire repaid its debts through strict budgetary discipline. This worked, but it took an extremely long time. For over 100 years, the British gave up two to three percent of their economy to repay its debts, which was more than they spent on schools and education. That didn’t have to happen, and it shouldn’t happen today. The second method is much faster. Germany proved it in the 20th century. Essentially, it consists of three components: inflation, a special tax on private wealth, and debt relief.

ZEIT: So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?

Piketty: Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed the second method with the three components that I mentioned, including debt relief. Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.

ZEIT: That happened because people recognized that the high reparations demanded of Germany after World War I were one of the causes of the Second World War. People wanted to forgive Germany’s sins this time!

Piketty: Nonsense! This had nothing to do with moral clarity; it was a rational political and economic decision. They correctly recognized that, after large crises that created huge debt loads, at some point people need to look toward the future. We cannot demand that new generations must pay for decades for the mistakes of their parents. The Greeks have, without a doubt, made big mistakes. Until 2009, the government in Athens forged its books. But despite this, the younger generation of Greeks carries no more responsibility for the mistakes of its elders than the younger generation of Germans did in the 1950s and 1960s. We need to look ahead. Europe was founded on debt forgiveness and investment in the future. Not on the idea of endless penance. We need to remember this.

ZEIT: The end of the Second World War was a breakdown of civilization. Europe was a killing field. Today is different.

Piketty: To deny the historical parallels to the postwar period would be wrong. Let’s think about the financial crisis of 2008/2009. This wasn’t just any crisis. It was the biggest financial crisis since 1929. So the comparison is quite valid. This is equally true for the Greek economy: between 2009 and 2015, its GDP has fallen by 25%. This is comparable to the recessions in Germany and France between 1929 and 1935.

ZEIT: Many Germans believe that the Greeks still have not recognized their mistakes and want to continue their free-spending ways.

Piketty: If we had told you Germans in the 1950s that you have not properly recognized your failures, you would still be repaying your debts. Luckily, we were more intelligent than that.

ZEIT: The German Minister of Finance, on the other hand, seems to believe that a Greek exit from the Eurozone could foster greater unity within Europe.

Piketty: If we start kicking states out, then the crisis of confidence in which the Eurozone finds itself today will only worsen. Financial markets will immediately turn on the next country. This would be the beginning of a long, drawn-out period of agony, in whose grasp we risk sacrificing Europe’s social model, its democracy, indeed its civilization on the altar of a conservative, irrational austerity policy.

ZEIT: Do you believe that we Germans aren’t generous enough?

Piketty: What are you talking about? Generous? Currently, Germany is profiting from Greece as it extends loans at comparatively high interest rates.

ZEIT: What solution would you suggest for this crisis?

Piketty: We need a conference on all of Europe’s debts, just like after World War II. A restructuring of all debt, not just in Greece but in several European countries, is inevitable. Just now, we’ve lost six months in the completely intransparent negotiations with Athens. The Eurogroup’s notion that Greece will reach a budgetary surplus of 4% of GDP and will pay back its debts within 30 to 40 years is still on the table. Allegedly, they will reach one percent surplus in 2015, then two percent in 2016, and three and a half percent in 2017. Completely ridiculous! This will never happen. Yet we keep postponing the necessary debate until the cows come home.

ZEIT: And what would happen after the major debt cuts?

Piketty: A new European institution would be required to determine the maximum allowable budget deficit in order to prevent the regrowth of debt. For example, this could be a commmittee in the European Parliament consisting of legislators from national parliaments. Budgetary decisions should not be off-limits to legislatures. To undermine European democracy, which is what Germany is doing today by insisting that states remain in penury under mechanisms that Berlin itself is muscling through, is a grievous mistake.

ZEIT: Your president, François Hollande, recently failed to criticize the fiscal pact.

Piketty: This does not improve anything. If, in past years, decisions in Europe had been reached in more democratic ways, the current austerity policy in Europe would be less strict.

ZEIT: But no political party in France is participating. National sovereignty is considered holy.

Piketty: Indeed, in Germany many more people are entertaining thoughts of reestablishing European democracy, in contrast to France with its countless believers in sovereignty. What’s more, our president still portrays himself as a prisoner of the failed 2005 referendum on a European Constitution, which failed in France. François Hollande does not understand that a lot has changed because of the financial crisis. We have to overcome our own national egoism.

ZEIT: What sort of national egoism do you see in Germany?

Piketty: I think that Germany was greatly shaped by its reunification. It was long feared that it would lead to economic stagnation. But then reunification turned out to be a great success thanks to a functioning social safety net and an intact industrial sector. Meanwhile, Germany has become so proud of its success that it dispenses lectures to all other countries. This is a little infantile. Of course, I understand how important the successful reunification was to the personal history of Chancellor Angela Merkel. But now Germany has to rethink things. Otherwise, its position on the debt crisis will be a grave danger to Europe.

ZEIT: What advice do you have for the Chancellor?

Piketty: Those who want to chase Greece out of the Eurozone today will end up on the trash heap of history. If the Chancellor wants to secure her place in the history books, just like [Helmut] Kohl did during reunification, then she must forge a solution to the Greek question, including a debt conference where we can start with a clean slate. But with renewed, much stronger fiscal discipline.

Greece Says ‘OXI’!

July 5, 2015 / / 0 Comments

And how! With over a third of the vote counted, it looks like ‘Oxi’ (‘No’ to accepting the conditions of the creditors latest offer) will win in somewhat of a landslide. Current numbers are showing over 60% of Greeks voted ‘No’. No matter whether you think this is the right choice or not, you have to admire the bravery of the Greek people choosing what is almost certainly the high risk option. So what happens next?

Next Steps

This is the part no one is sure about. Within Greece, Syriza has been campaigning for the ‘No’ vote on the basis that it will not result in a Greek exit from the Eurozone, but that it will strengthen the hand of the Greek government in negotiations with the creditors. While it certainly provides them with a strong mandate to turn down the current offer, getting a better deal depends on the creditors.

Outside Greece, popular opinion is that the creditors have too much to lose from making concessions to Greece. The fear is that if concessions are made this would encourage other countries, primarily Spain, Portugal and Ireland, to elect anti-austerity parties, similar to Syriza, and also request concessions.

This doesn’t mean further negotiations are pointless, there could be a middle ground. The bargaining positions of the two parties before the referendum were already very close, with Syriza then making further concessions after calling the referendum. It would seem conceivable that the creditors could quietly agree to the final offer from Syriza (or something close to it), lose a little bit of face, but still basically get their way. Will Merkel, Junker, Schäuble et al be able to stomach making any concessions at this point? That remains to be seen. If no deal is reached though, a Greek exit could be on the cards in the very near future.

What About Europe?

Regardless of what happens economically, the impact of this referendum appears certain to have ongoing political fallout. The level of excitement and the joyous reconnection with the democratic process that occurred in Greece, in addition to the result, is sure to resonate with people across Europe. In countries that have also been struggling with high unemployment and poor economic performance, largely as a result of austerity policies, people are sure to be taking particular notice. Although the economies of these countries are now performing significantly better than the Greek economy, and have more manageable debt burdens, the improved conditions are yet to be felt by the majority of people. In Spain, a country that has itself undergone high levels of very unpopular austerity, the economy has been growing strongly over the past year, but unemployment still sits above 20%. 

For this reason, the governments in these countries (particularly Mariano Rajoy in Spain) were often the ones arguing the hardest for no concessions to be given to Greece. In what appears to be a purely political calculation, this stance was taken not with any thought for the suffering of people in Greece or their own countries, but to short circuit popular support for anti-austerity parties domestically. Those leaders will surely have some tough weeks (and probably years) ahead.

Greek Debt Crisis Enters Final Stage

June 27, 2015 / / 0 Comments

The never-ending saga of the Greek debt crisis appears to be finally entering its final phase this week. After 5 months of negotiations, Greece’s creditors, led by the IMF, have made a final offer to the Greek government, and it is an offer of more of the same – i.e. austerity. For its part, the Greek government needs to make a decision before Tuesday next week when it is expected to run out of cash.

Background

For those that have seen the headlines, but have not had the time to dig into what is actually happening in Greece, first a little background.

As early as 2010, it became clear that the Greek government was in trouble financially. It was running large deficits and was quickly accumulating a debt that bond markets increasingly believed were unlikely to be repaid. As a result, the yields on Greek Government bonds (the rate of interest that the Greek government has to pay to borrow money) began to spike, further increasing the risk that Greece would be unable to repay its debt.

To avert a crisis, the IMF, the European Commission and the European Central Bank (“the Troika”) provided loans to the Greek government to help pay off their existing debt. By doing this, these organizations essentially took the majority of Greek government debt off the books of a range of mostly German and French banks, and put it on their own books.

However, in exchange for the provision of these loans, the Troika insisted that the Greek government implement a series of measures to improve the budgetary situation. These measures mainly consisted of cuts to the public service and pensions, but also tax increases, and other measures. Generally these measures are referred to as “austerity measures”. Despite the warnings of many prominent economists that cutting government spending in a recession would cause further damage to the Greek economy, the measures were pushed through – as they were in a range of other countries.

Sadly, the warnings provided proved accurate. By January 2015, the Greek economy was suffering from 25%+ unemployment and GDP had fallen 25%, far more than had been forecasted by the Troika at the outset of austerity. As the economy shrunk, so did government revenues and so further cuts were required to try meet the surplus target.

In January this year, the Greek people tired of years of crushing austerity, elected what has been called a ‘far-left’ government[1]. Syriza, a party that for most of the recent past had been attracting less than 10% of the vote, was all of a sudden front and center, and with a clear mandate to renegotiate and bring an end to austerity – but also to keep Greece in the Eurozone.

What is Happening Now?

After 5 months of increasingly bitter negotiations between the Syriza government and the Troika, and with the deadline approaching (Tuesday next week), there were two final offers made.

For their part, the Greek government proposed a range of austerity measures that more or less met the Troika’s demands in terms of net budgetary impact. The difference was that they proposed smaller cuts to pensions with the gap being made up with a range of tax increases. Hilariously, the proposed measures were rebuffed over concerns it would hurt the growth of the Greek economy.

The Troika then made their final offer to Greece. Even after all the evidence of how destructive and counterproductive austerity, the offer was basically the same as the original demand. Many took this as a sign that the Troika are aiming to force Syriza out of government, or Greece out of the Eurozone.

What happened next appears to have caught most observers by surprise. On Friday night, the Greek Prime Minister Alex Tsipras announced he would take the final offer to a referendum to be held on July 5th. Although this is sure to further aggravate the Troika (if that is even possible), this would actually appear to be a very clever move on the part of Syriza.

The biggest issue for Syriza since their election has been how they would manage to maintain their two key promises – to stay in the Eurozone and bring an end to austerity. After 5 months of failed negotiations, they have almost certainly proved beyond doubt that the Troika are not going to give any ground on austerity. By calling a referendum, they force the Greek people to choose what they want more – Eurozone membership or the freedom to run their own economy. Either the Greek people willingly accept further austerity in exchange for staying the Eurozone, or they accept exiting and take their chances on their own.

For their part, Syriza have made it clear they believe going on their own is the better option. As part of his announcement to the Greek people, Tsipras took the chance to lambast the institutions making up the Troika (translated from Greek):

“These proposals -– which directly violate the European social acquis and the fundamental rights to work, equality and dignity — prove that certain partners and members of the institutions are not interested in reaching a viable and beneficial agreement for all parties, but rather the humiliation of the Greek people.”

“Greek citizens, I call on you to decide –- with sovereignty and dignity as Greek history demands — whether we should accept the extortionate ultimatum that calls for strict and humiliating austerity without end, and without the prospect of ever standing on our own two feet, socially and financially.”

What Happens if the Greeks Choose to Exit?

No one knows for sure – but it won’t be pretty. Essentially, a chain of events will mean Greece will need to revert back to their own currency (essentially a new Drachma), which in itself leads to further impacts. The first and most serious of which is that the Greek government would need to impose capital controls – basically stopping people from moving their money out of Greece.

In anticipation of this measure, Greeks have been pulling Euros out of Greek banks at a record pace the last few weeks and either moving it offshore, or effectively stuffing their mattresses. After the announcement of the referendum, the pace further quickened with pictures flooding into Twitter of lines at ATMs on Saturday morning and reports that many ATMs had already run out of cash.

Looking further forward, after the change to a new currency, there is an expectation that it would depreciate very quickly against the Euro. As a result, vital imports like oil and medical supplies would suddenly become hugely more expensive causing problems in the health sector as well as for business in general. On the flip side, this depreciation should provide a boost to Greek exports (primarily tourism and agriculture). However, it is questionable how much benefit this can provide given the large internal devaluation that has already occurred.

The only possibly good news is that the Greek government is already running a primary budget surplus (surplus before the costs of borrowing are included). By defaulting on its existing debt, it would not need to issue new debt to meet payment obligations in the short run (although a depreciating currency could impact that). Longer term, by most measures, the Greek budget is actually in a strong structural surplus (i.e. if the economy wasn’t hugely depressed, the budget would be in a much better position than it currently is). If the Greeks could manage even a small amount of growth after leaving the Euro, they could find they are quickly running large surpluses.

For the Eurozone, a Greek exit is no longer the risk to financial stability that it once was, but it could be a risk to political stability. If Greece does exit the Eurozone, there will be several countries monitoring the situation very closely. Spain, Portugal and Ireland (not to mention Italy) have all undergone differing levels of austerity over the past 4-5 years, and all have seen very high levels of unemployment and significant falls in GDP as a result. If (and it is a big if) Greece exits the Eurozone AND manages to keep the country from falling apart completely, these other countries may be tempted to do something similar.

From there, the Eurozone project could completely unravel. And make no mistake; this would also be disastrous for the northern European economies, including Germany. Without the relatively unproductive southern European countries in the shared currency zone, the Euro would be expected to appreciate strongly, doing serious damage to Germany’s export driven economy and even more so to less efficient countries like France and Italy.

This scenario has led to some speculation that the Europeans will try to make any Greek exit as difficult as possible – to deter other countries from exiting. But this strategy has its own political ramifications. Essentially the European Union would start to look like a union held together by the threat of economic ruin rather than goodwill and mutual benefit. At that point, the question becomes what kind of union does Europe really have?

What Happens Next

Even though the Greeks have declared their intention to hold a referendum to decide on whether they will accept the bailout conditions, they don’t actually have enough cash to survive until the referendum date. As such, they are asking the creditors to provide an extension for a few days to get to the referendum.

Early indications are that they will be refused even this small extension (the creditors are really pissed off…). To do this would appear to be a dumb move politically and with very little gained financially, but it took a lot of dumb moves to get to this point, so nothing can be ruled out. If they do hold the line and deny Greece the extension, essentially everything gets moved forward. On Tuesday, assuming the European Central Bank stops providing liquidity (cash) to Greece’s banks, the Greek government would be forced to step in with a new currency and we will officially have the first example of a country leaving the Eurozone.

The Greeks have put the gun to their collective heads and shown they are ready to pull the trigger. The only question left is will Europe stop them, or hand them a bigger gun?

Further Reading

For further details of why a Greek exit from the Eurozone will not be a panacea to the countries woes, Greek finance minister Yanis Varoufakis actually provides one of the best explanations I have seen here. In fact, Varoufakis, who has a master’s degree in Mathematical Science and a PhD in Economics, has been very active on Twitter and his blog throughout the negotiation process, often taking to the public to deny claims of insults and walkouts. To my mind he has remained the perfect professional throughout this process.

For Australians, there is also a personal connection to Varoufakis, who was senior lecturer in the Economics department at Sydney University for 11 years from 1989 to 2000. He also regularly provided commentary on the crisis (before being elected) on Late Night Live – a radio program hosted by Phillip Adams (is there anyone with a better voice for radio?). I highly recommending listening to an interview conducted just after Varoufakis was elected to get a sense of the man – and that most Australian of traits, self-deprecation.

 

[1] If anyone can point me to a policy that could reasonably be called far-left, I’d love to see it.

Eurozone Perceptions

March 30, 2015 / / 0 Comments

It has long been a perception held by many in the western world that the people of southern Europe (Spain, Portugal, Italy and Greece for the purposes of this article) have a particularly easy-going approach to work, life and financial responsibility. Whether this is a good or bad thing depends on who you ask and even what time of year you ask them as Ed Vulliamy describes.

However, with the onset of the European debt crisis, these perceptions have taken on a new prominence as they are now used to justify the harsh austerity being forced on Southern European nations, with special scorn and head shaking reserved for Greece in particular. At the deepest level, the enforcement of austerity is being spun as a moral tale – the people of Southern Europe are suffering for their laziness and financial irresponsibility. The financial irresponsibility aspect of this is a topic for another article, but here we will look at the evidence supporting the proposition that people in Southern European nations are ‘lazier’ than their northern European neighbors.

The first step in analyzing this proposition is defining how we measure ‘laziness’. In general, laziness refers to a lack of willingness to work or expend energy. Given we have no quantitative way of comparing how much energy people are expending, or their willingness to perform work (what a different world it would be if we could!), a good proxy to determine relative energy expenditure, and therefore laziness, is the number of hours worked. Conveniently, the OECD produces statistics on average hours worked per person per a year for most OECD nations, which includes most of the European nations we are interested in.

An argument can be made about the productivity of the respective workers but productivity has its own larger distortions due to the impact of differing levels of capital investment. A German working in a car manufacturing plant controlling a high tech automated assembly line will be much more productive (in terms of the value of his output) than an Italian waiting tables in a coffee shop – but this tells us nothing about the level of effort (or lack thereof) being expended, and also nothing about the time being spent at work.

So looking at the OECD statistics on hours worked, what do we see for the countries we are talking about?

Table 1

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What we see is actually the opposite of the commonly assumed situation. The famously hardworking Germans are averaging less than 1,400 hours a year of work or under 27 hours a week averaged over 52 weeks. This is actually the 2nd lowest of all countries in the OECD in 2012. Meanwhile, the Greeks, often held up as the epitome of laziness (at least in Europe) actually work some of the longest hours in the OECD – the third longest in fact, behind only the Koreans and the Mexicans. In 2012 the average Greek clocked up 2,034 hours of work, or the hours of almost 1.5 Germans. So how do we explain this? How can the perception be so different to what we are seeing here?

When we look at the data, some trends begin to emerge that explain some of the differences in hours worked. The first and most obvious trend that emerges when we expand our dataset to the full OECD and for all years covered is a negative correlation between hours worked and GDP (PPP) per capita (a rough proxy for wealth – see Chart 1). The trend is clear, both across countries and across time, and intuitively this makes sense – as people get wealthier, they feel less need to work long hours.

Chart 1 – GDP per capita (PPP) Vs. Average hours worked per person per year – OECD Countries, 2000-2012

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Asides from the negative correlation between GDP (PPP) per capita and average hours worked, there are a few other observations we can make looking at this chart. The first observation is that the minimum hours that people work seems to bottom out at around 1400 hours a year – more or less where Germany and the Netherlands sit currently. Again this conclusion checks out logically. Subject to the social expectations and the demands of a given job, people aim to reach a comfortable balance between work and leisure time. Once this is achieved, they generally let any further increases in income accrue to their wealth rather than further reduce their working hours.

The second observation is that at any given level of GDP (PPP) per capita, there is a still a high level of variability between countries as to how many hours the average person will work. More than anything, this shows there is a range of factors that create variances in hours worked between countries. Labor force restrictions, minimum wage, unemployment benefits, education levels, inequality and the general structure of the economy will all affect the hours worked at a given level of GDP (PPP) per capita.

What else can we determine looking at this information? If we believe wealth to be a major factor in how many hours a person will work, what would it look like if we could remove the impact of wealth? In fact we can remove the wealth effect from this data by building a simple linear model that estimates the average amount of hours a person would work given a certain level of GDP per capita. From there we can then see where countries lie relative to the model prediction, effectively telling us which countries are working more hours than we would expect for their relative level of wealth, and which countries are working less. The 2012 data, with a linear model applied is shown in Chart 2.

Chart 2 – Average hours worked per person per year Vs. GDP per Capita (PPP) – OECD Countries, 2012

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What this model tells us is that for every extra $1,000 of GDP (PPP) per capita, the average person will work 16.4 hours less per year. When we use this model to predict the number of hours the average person will work per year based on the GDP (PPP) per capita of their country, we come up with an estimated hours worked per person per year for each country, which we can then compare to the actual value for each country. The results of this comparison are shown in Chart 3.

Chart 3 – Average hours per person per year – Actual vs. Forecast, 2012

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What we see is that even if we remove the differences in wealth from average hours worked per person per year, the average citizen in many northern European countries (particularly Germany and Denmark) are still working less hours than we would expect. The verdict for Southern European nations is more mixed. People in Portugal and Spain are also working fewer hours than we would expect, the Italians are more or less in line with expectations, while the Greeks are again well ahead of what would be expected.

So what is the bottom line here? What conclusions can we take away from this? The answer is surprisingly little. There are a huge range of incentives and disincentives that are unique to each country that we are completely ignoring in this analysis. We also have no way of identifying how effective or productive different people are while they are at work, which as I’m sure anyone who has worked with another human being can testify, can vary pretty dramatically. So, despite the above evidence, no one should be prepared to believe the people of Germany or Denmark are ‘lazier’ than people in Mexico, the US or Korea. What we can say though is what evidence is missing from the above analysis – and what is clearly missing is any evidence that the people of southern European nations are ‘lazier’ than their northern European counterparts.

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