Stunning my readers by emerging from long silence, it's time to finally make another topical post. My nose and sinuses are nicely recovering from recent surgery (as my Facebook friends know), work is a bit quieter, and there are no looming concerts. So I thought I'd take advantage of all that to comment on the current world financial crisis, which revolves around the Euro. Not that I'm particularly well qualified to comment on financial matters. I mean, I read the Economist every week, and I possess a modest number of Euros in my bank account. But I didn't study economics or political science, I'm not one of the famous German "5 Wise Men of Economics". I know, I should probably translate the name with "5 wise persons" - but unfortunately they've never had a female member. Anyway, you should take anything I say here cum grano salis, as they say.
So anyway, at issue here is the fact that the Greeks are in a bit of a pickle because as a nation they've been living way beyond their means for years. For quite a while after they joined the Euro (which they were only able to join by cooking their books) they lived high off the hog, their economy stimulated by the below average interest rates made possible by Euro membership. Essentially the thriftiness of the Germans carried over to the interest rates they paid.
But they failed to deal with the endemic inefficiencies and corruption in their economy. And as the world economy grew worse, their ability to compete grew worse. Germany reformed some of its labor laws in the past decade, cutting unit labor costs and raising productivity. Greece neglected to do this. The markets started to notice and the interest differential they had to pay for government bonds over the rate on German bonds grew. Two weeks ago they were downgraded to the level of junk bonds. Many in Europe decried this as evil speculators trying to destroy the Euro, but I see it as a rational reaction by investors.
The great fear is that if Greece is forced to default, or even leave the Euro, it could provoke a domino reaction in Portugal, Ireland, and possibly even Spain and Italy. All of these countries have problems with the government deficit (though in most cases not higher than the US federal government deficit); Portugal, Spain and Italy also have problems with an overly restrictive labor market and consequent high unemployment.
So the wealthier European countries, together with the IMF, are getting together to create a fund to be used to prevent any Euro member from having to default. € 750 million are being put aside for this purpose in the form of guarantees. If everything goes well the guarantees won't be needed. If things don't go well, it's going to be hugely expensive for German taxpayers, among others. Of course the German tabloid press is going to town with this, headlines blaring "We're the idiots paying for the Greeks' early retirement" . But they all miss one small important point - German (and French) banks are among the larger holders of Greek government bonds. If the Greeks default, it's really going to hurt the German and French economies (and quite a few others).
So on the whole I think Europe is doing the right thing by attempting to prevent a Euro meltdown. It will be necessary to attach tough conditions for economic reform. Frankly, I think labor market and tax collection reform are more important in the mid to long term than just fiscal restraint. Fiscal restraint alone could kill the economies.
Just my two Euro cents!
So anyway, at issue here is the fact that the Greeks are in a bit of a pickle because as a nation they've been living way beyond their means for years. For quite a while after they joined the Euro (which they were only able to join by cooking their books) they lived high off the hog, their economy stimulated by the below average interest rates made possible by Euro membership. Essentially the thriftiness of the Germans carried over to the interest rates they paid.
But they failed to deal with the endemic inefficiencies and corruption in their economy. And as the world economy grew worse, their ability to compete grew worse. Germany reformed some of its labor laws in the past decade, cutting unit labor costs and raising productivity. Greece neglected to do this. The markets started to notice and the interest differential they had to pay for government bonds over the rate on German bonds grew. Two weeks ago they were downgraded to the level of junk bonds. Many in Europe decried this as evil speculators trying to destroy the Euro, but I see it as a rational reaction by investors.
The great fear is that if Greece is forced to default, or even leave the Euro, it could provoke a domino reaction in Portugal, Ireland, and possibly even Spain and Italy. All of these countries have problems with the government deficit (though in most cases not higher than the US federal government deficit); Portugal, Spain and Italy also have problems with an overly restrictive labor market and consequent high unemployment.
So the wealthier European countries, together with the IMF, are getting together to create a fund to be used to prevent any Euro member from having to default. € 750 million are being put aside for this purpose in the form of guarantees. If everything goes well the guarantees won't be needed. If things don't go well, it's going to be hugely expensive for German taxpayers, among others. Of course the German tabloid press is going to town with this, headlines blaring "We're the idiots paying for the Greeks' early retirement" . But they all miss one small important point - German (and French) banks are among the larger holders of Greek government bonds. If the Greeks default, it's really going to hurt the German and French economies (and quite a few others).
So on the whole I think Europe is doing the right thing by attempting to prevent a Euro meltdown. It will be necessary to attach tough conditions for economic reform. Frankly, I think labor market and tax collection reform are more important in the mid to long term than just fiscal restraint. Fiscal restraint alone could kill the economies.
Just my two Euro cents!
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