As a German I must say that in my opinion this article captures the German sentiment very well. On the one hand it is short sided, it will likely lead to more economic problems than necessary and the stance of the Euro members (and Germany especially) on Greece is hurting the economy there much more than necessary.
On the other hand I do feel that some of this sentiment is justified. After all the example of Italy (Bond markets demand high risk premiums, Italy announces much needed reforms, ECB buys Italian bonds, Italy removes reforms) is quite telling. The same (much worse, actually) applies to the financial institutions. What precedent have we set by bailing almost all of the out. Without a lot of reform investors will no doubt assume that financial institutions are state-guaranteed, allowing them to continue the tails I win, heads you (the state, taxpayers) loose game. Clearly more decisive action is required to deal with the current problems but I think we are deluding ourselves if we believe that we can make it out of this debt crisis only by clever policies.
It only makes sense, right? Personally i am quite pleased that the Germans lead this psychological warfare against the faceless 'markets', that are pushing more and more to funnel taxpayer's money in their ill-gone investments. As a greek, i find it ridiculous that the world's markets are turbulent over a tiny small country like Greece (the only PIGS country that is actually bankrupt), and exaggerate the risks so much. I do agree that markets have changed and it's time for a reform [What lessons have we learned from the 2008 crisis: None].
Have you ever thought twice about what exactly "faceless markets" are? Markets are composed of many agents, people, institutions, and mostly your pension money! It's true. Pension funds and other institutional investors are the single-largest segment, esp. of sovereign bond markets! Now ask yourself, with the Greek government in its current position, if it came to you today and asked you to lend it money, not to invest it in some thing or other but merely to pay back previous creditors, would you do it?! Yeah, me neither...
It's a copout by politicians and the bozos they represent to ascribe individual actions such as "pushing" or "punishing" etc. to aggregates like markets. But just as the laws on the molecular level do not simply reflect those on the subnuclear level of matter, the construct of "representative agents" is a fiction. Aggregation in the social sciences is just as hard and unintuitive as in the natural sciences, maybe even harder.
So why do they do it? Because to anthropomorphize "the market" allows them do demonize it, making things simple for the bozos in describing current developments as some kind of "struggle" between supposedly good central banks and politicians and evil, "faceless markets". Unfortunately, this type of rhetoric completely misframes the issues and leads invariably to wrong decisions by building political pressure at the wrong points in the system.
Markets are indeed composed of many agents, people and institutions squandering your pension money, all of whom hide behind the faceless market, arguing that if "the market" is doing it, it has to be right. Which is exactly what got us into this mess in the first place - everyone shirking off responsibility for their actions.
Does that mean that you should be forced to sell things for a price lower than you're willing to accept, or that you should be forced to buy things for a price higher than you're willing to pay?
Ah yes, the poor and irresponsible financiers have to take a haircut. Better that the Greek people should pay the price for a generation for little more than believing the lies their politicians told them to get elected, as they piled on the debt? If there were a way to wring a solution to this crisis out of those most responsible (Greek politicians) I would have us do it, but there isn't. So irresponsible lenders and irresponsible voters, and nations who perhaps irresponsibly guided Greece into the Euro in the first place, will have to share the burden. Sorry this doesn't jive with your Randian neo-libertarian bullshit ideas about how things actually work.
I fail to believe that markets serve the common good when the price of gold (a barely useful metal that on its own can't feed a single child) soares and also that the economic output of europe relies on greece. That's what the market would suggest. I'm not saying kill the markets, i just like rational markets. PSI invested in greek bonds (for 10 years now), for their own reasons, let them take the hit.
> Now ask yourself, with the Greek government in its current position, if it came to you today and asked you to lend it money, not to invest it in some thing or other but merely to pay back previous creditors, would you do it?! Yeah, me neither...
Absolutely not. Nobody rational would. That's the point.
>> [...] this psychological warfare against the faceless 'markets', that are pushing more and more to funnel taxpayer's money in their ill-gone investments.
> Have you ever thought twice about what exactly "faceless markets" are? Markets are composed of many agents, people, institutions, and mostly your pension money! It's true.
Yeah, so? They don't have to step up and ask for a loan. They just sit back in their masses and demand institutionalized theft to bail out their investments.
And why does it suddenly make things right that it's just regular people doing it?
Greece is simply the tip of the iceberg, the bit above the sea which you can see, whatever solution is eventually found for Greece will likely be taken as precedent for the rest of southern europe.
The sentiment is justified, but the position is untenable. With every passing day, Greek debt compounds massively, and the hole gets bigger. Meanwhile, the uncertainty in the markets causes further volatility and pain for all concerned, and you risk the setting in of total panic. You end up with the worst of both worlds: all the market pain of a Greek default, without the default itself...but with the default still quite likely.
The Greek economy is dysfunctional to its core (even a passing skim-through of Michael Lewis's new book will give you a sense for just how dysfunctional it is). But that isn't the root of the problem. The root of the problem is that Greece was brought into the Euro monetary collective in the first place, and given the credit ratings and borrowing rates of a country like Germany. Banks had a large part in helping put lipstick on the Greek pig, covering up its systemic flaws and getting it ready for EU primetime.
So imagine that Greek dysfunction was like a caged and abused pitbull, and Greece's EU inclusion was like walking into that cage waving a bloody hunk of meat in either arm. Who do you blame when you lose a few limbs: the pitbull, or yourself?
There's an interesting extension of this line of thought. My sister-in-law works in Istanbul for a Greek company. She says that most of the actual profit-generating work done for this company is done in Romania or Turkey. The Greek offices, from what she describes, are more or less completely dysfunctional.
Now, take that insight of conditions on the ground along with a chart of the growth of the Greek vs Turkish economies over the last decade, and then ask yourself: why is Greece a full EU member and included in the Eurozone, while Turkey's membership negotiations have completely stalled (and will probably conclude with Turkey not joining the EU)?
Can you imagine a world where Greece is allowed to leave the Euro, massively devalue its debt (and take the decade or more of restructuring/rebuilding its economy that would come with that), and Turkey with its strong manufacturing sector and youthful, growing middle class is brought in in Greece's place? The EU and the Euro would be in a far stronger position...but it will never happen. Unfortunately, European cultural prejudices are still to ever-present and will result in Greece continuing to be dragged along while Turkey gets shunned.
Human rights are a factor, plus there's the fact that Turkey is a Muslim country, though many in the EU won't admit that. But even that could probably be overlooked if not for the fact that Turkey is a huge country. With a population of 73 million people (and a growing population, whereas many European states are stagnant in this regard), Turkey would immediately become the second-largest EU state, which means more members of the EU parliament than France or the UK and more voting power in those institutions where countries vote by weighted population.
If Turkey were a Muslim country with a European toehold and a history of dodgy human rights abuses but a general trendline towards democracy and it had a population of about 10 million, the EU would be falling all over itself to admit it and show how enlightened it was.
Some Turks joke that the Turkish army has the largest gay porn collection in the world.
According to a Turkish friend of mine, yours is not an accurate characterization of Turkey. There are still huge problems with democracy, power of the army, corruption, media controlled by people in power, torture, Cyprus, and more. According to him many of these things are worsening -- he is afraid that Turkey is going to go further in the direction of Syria instead of the EU. Telling is the 6 month compulsory military service for all men, except gay men, who are barred from military service and are considered to have a disease in need of treatment by the minister of family affairs. Those who follow the rules (and choose safety over the risk of rape and violence) and disclose that they're gay are asked to supply photographic evidence of enjoyment of being penetrated as proof (being exclusively the active sexual partner is not considered gay). The less lucky have to undergo a rectal medical exam. Additionally on the point of censorship: gay organisations' web sites are being blocked by the government.
Despite improvements in the economy Turkey is not yet fit for joining the EU. Sadly "stuff like the acceptance of evolution" (see below) is one of the least of the concerns.
I am not at all trying to minimize Turkey's real problems. But many of the Eastern European EU states also have some of the same or similar problems (particularly Romania and Bulgaria). In their cases much of the reason given for admitting them to the EU was that membership would bring them closer to European norms. (Indeed, this is an incentive held out by those in Europe who favor Turkish EU membership.)
My point is that all these problems would be easier to ignore or fix if Turkey had 10 million people. At 70 million, they'd have such a strong voice in EU institutions that they'd be as likely to change the EU as vice versa.
I agree the population size is a huge part of the problem, though I think it has more to do with immigration worries than voting-in-EU-institutions worries. There was already a bunch of nationalist ire over the proverbial "Polish plumbers" flooding western Europe and undercutting local labor, once they were fully admitted to the EU with free movement of labor. The prospect of 70 million Turks having the right to move to any city in Europe is much more unpopular than that (and good fodder for anti-immigrant populist parties), because there's more of them, they're poorer, and they're perceived as more foreign. If it were 10 million Turks, there might be more of a chance of getting people to agree.
yep, what GP called "European cultural prejudices" is just a thousand year of direct experience and knowledge that the gradient of how wild and barbaric things become grows when one moves from inside the Europe through East/South Europe toward Russia/Turkey (i need to hand it to Turkey though - "photographic evidence of enjoyment of being penetrated as proof (being exclusively the active sexual partner is not considered gay)" beats a lot of what i could say about my old country :)
IMHO the answer is to show Turkey what they're missing. Open our borders (Canadian specifically, but all ideally) to their mistreated (and those from everywhere else) and let them live happy productive lives.
Accelerate the brain-drain until nothing but the dictator is left, then go back and take over.
The cynic in me sometimes wonders if this argument is used as a red herring, and that there are other issues that need sorting out (involving money and control).
Of course there are control issues as well, turkey has 73 million population and so would instantly be the 2nd largest voting bloc, very likely to become the biggest due to demographics in the future.
It would make sense to have a much stricter standard for accepting large than tiny countries as new members.
Turkey has grown strongly lately, but GDP/Capita is still 1/3 of Greece and 1/5 of Germany. I wish them all the best, but they are still a quite poor country. (and if you look at stuff like the acceptance of evolution (extremely low), an argument could be made that they are quite backwards too)
It was mentioned today that the Greek government employs TWENTY PERCENT of the population - and there was a 100-year old constitutional law that prevented the effective firing of anyone working in the government.
This is institutionalized graft and is surely a main contributing factor in the corruption.
Meh. Our governments (USA, Canada, EU) waste more, they just give it to lobbyists. At least this is a bottom-up instead of our top-down theft.
Given that the lower income you have the more of your income you spend, giving stimulus packages exclusively to the poorest members of society and letting it trickle up seems the only reasonable way to do it.
I see only one way out : find responsibles and punish them. Through fines and prison terms. Some people have hidden the true state of Greece by fraudulent accounting with the help of experts from Goldman Sachs.
Politician who participated in that should be judged for treason. Financial experts for fraud. Goldman Sachs must be fined heavily for this.
Right now, Dexia is falling despite 6 billions of aid in 2008 and a successful "stress test". Obviously some fraud happened there too. There are many places where inquiries should be made.
Heads must roll, then austerity will become a possibility. Many people see this as just an economical problem but it is a very political one. There is a crisis of legitimacy amongst the people who are organizing the austerity : in most place it is the same people who caused the crisis.
I'm not sure the falsification of records is really at the root of this, in the sense that it was a deception that did not really deceive anyone. There was a bit of consensual hallucination going on: nobody really believed Greece's numbers, but it was convenient for everyone to pretend to believe them. Lenders who bought Greek bonds should certainly have conducted their own analyses and had a decent idea that the headline figures were not accurate (I would guess they did, actually, but assumed that Greece wouldn't be allowed to default, so bought the bonds anyway).
Yes, everyone knew the Greeks were cooking the books. Hell, even the press knew - it was in the papers. But the expectation was that once they joined the Euro they would act more like Germans.
That seems to have been a bit of a miscalculation.
I do think there have been significant improvements in Greek public administration since joining the Euro, but miracles would've been needed to get the turnaround that would've been necessary in such a short time. If Greece had had 20 years to gradually get its economy in line with western Europe, I think it was on pace to do so, or at least come close, but the 7 years between it joining the Euro in 2001 and the financial crisis of 2008 weren't really enough, especially since some of the positive structural changes it had made (like the beginnings of pension reform) don't really pay dividends until some time into the future. Joining the Euro did help somewhat in improvements also, because Greek politicians were able to use the "it's not us, Brussels is making us" excuse to push through some of the less popular measures.
The changes, at least from the perspective of some of my Greek relatives, were pretty encouraging up 'til 2008. The notoriously inefficient public administration was still not good, but seemed to be getting better; some things that used to require you running across town to get physical stamps from 10 different offices were being consolidated in common service centers, the number of separate approvals needed for any given document was being reduced, etc. Outright corruption was greatly reduced from the pre-Euro government, and book-cooking seems to have been reduced as well (the vast majority of the dodgy statistics are pre-2001 data). The telecom sector got much better than the old OTE-or-nothing monopoly, leading to many Greeks finally having home internet. The Athens metro finally finished construction (partly spurred by the Olympics). The national sport of tax evasion was slowly being tackled, starting with "soft" shaming measures like publishing maps showing purported average incomes of various wealthy suburbs of Athens, if you took their official tax returns as accurate (all the wealthy suburbs somehow look like low-income ghettoes!), and moving to more hardball measures like doing inventories of yachts in yacht harbors and inquiring with owners who appear not to have ever reported sufficient income to explain owning one. Pensions went through at least the first round of rationalization to remove the most egregious loopholes that allowed some people to retire exceptionally early. Etc.
But basically the scope of changes needed was quite large, and the amount of cushion Greece had, with an already very-large debt, was quite small. Probably someone should've noticed the looming problem earlier and worked out a sensible restructuring and feasible N-year plan before it became a crisis.
You're being far too generous. It's not just that the public administration was bad before the Euro - it got worse after 2001 when politicians used borrowed money to buy votes. Pay for Greek civil servants has doubled since 2001 in real terms.
The really sad part of all this is it represents a horribly squandered opportunity. If expenditures had been kept steady and the government just rolled over existing debt in 2001 into bonds with the new far lower interest rates it would have been a win for everyone.
The german government seems really wise in this regard. The notion that there are any easy "fixes" to something as complex and intricate as an economy is very suspect to me. Things like quantitative easing seem way more dangerous than simply making sure your financial fundamentals are sound.
While morally entirely correct (IMHO, I'm Dutch, we also use the same word for guilt as we do for debt) I doubt the Germans can hold on to this position for very long. Apparently the German "Landesbanken" are heavily invested in Greek and other crappy debt, which is a problem because these banks also fund a large part of the "real" German economy. So Germany probably has no choice but to prop up the lousy debt.
That's the main quandary that the politicians/economists appreciate but the general public doesn't, I think: either way Germany is stuck bailing out this debt, because in large part it's not really bailing out Greece, but bailing out German banks. The main choice is whether to pay the banks directly (let Greece default on the bonds, then cover the losses to keep banks solvent), or to pay them indirectly (send Greece enough money for it to keep servicing the bonds).
I've said this over and over again to Germans that I know and they simply don't believe what you say. They really think that they are bailing out profligate Greeks and that there is no benefit to them. Politically, it isn't feasible for Merkel to come out and say that German banks need to be bailed out. It's much easier to talk about European unity and solidarity as the reason for "bailing" out Greece.
Germans pride themselves on their fiscal restraint. They save and abhor debt in their personal lives. I think it would shock them to know that their banks are close to insolvency because they took German savings and lent the money to Greeks and Portuguese. If the German government were honest about the poor state of their banks then the government would not survive.
I agree. The simplest way to make this clear is to simply let the Greek banks default (and any other banks for that matter). This will expose the German banks and the German Government will be forced to bail them out. This bailout will be a much easier sell than the current one as it will be clear to the German taxpayer that they are bailing out their own banks who made bad bets out of greed, lack of diligence and just plain ineptitude(just like all the other bankers around the world).
There is this constant argument about "confidence" going around. We must maintain investor confidence etc. There is a limit to that and its much shorter than its usually stretched to. I've seen the same thing in software where management will cover up a systems flaws and press on with new features. In the end it all falls apart and a post mortem always reveals that they should have faced up to the problems sooner. So fk confidence, the whole thing is going to fall apart anyway and the longer we leave it the harder it will be to fix. Let the Greeks default and let the bankers take the hit, replace them with some talented young people (there are plenty) and lets get fixing things now that they are no longer covered up.
German banks are - by a large margin - not the most exposed to Greece. French banks for example are much more exposed to Greek dept. If Greece fails, this will hit German banks, but other banks much more, it might be especially hard for countries with a smaller GDP and a higher bailout/GDP ratio.
As a German taxpayer I don't care whom I bail out.
Funny thing: People talk about Germany, instead of Greece. Sure, bailing out German banks will cost some money, a state breakdown in Greece will cost Greek people much more.
Bailing out the Greeks made some sense when it was seen to be cheaper than bailing out German banks. But as the situation stands it looks like bailing out Greece is throwing good money after bad, and the German banks will have to be bailed out anyway. So from the German perspective the right thing to do would be to let the Greeks go bankrupt.
The total exposure of French banks to Greek debt is larger than the total exposure of German banks to Greek debt, true, but the problem for Germany as a whole is that a specific group of German banks, namely the Landesbanken that fund a large part of German industry, have comparatively large proportions of their holdings in Greek debt.
So the Germans don't have to worry about bailing out Commerzbank or Deutsche bank the way the French are worried about BNP or Credit Agricole, but they do have to worry about what happens if the Bayerische Landesbank can no longer fund Bavarian factories.
One thing I'm somewhat confused about is why a bailout is better than default. In both cases the banks cannot pay back loans so their credit is worthless right? In a bailout the government becomes the bank (through a proxy) but its still the governments credit, not the banks'. So keeping the banks alive, instead of allowing them to default would keep jobs, but wouldn't it be keeping the jobs of people who, for lack of a better term, didn't actually do their job?
That happens pretty commonly even in a traditional view of debt, though the dividing line for whether the lender or lendee is more to blame varies. At one extreme, if you lend money to an alcoholic who's well known for not paying back his loans, and he spends it on alcohol and doesn't pay you back, not too many people will be sympathetic to you for making an obviously-stupid loan. In fact they might blame you for enabling bad behavior in an entirely predictable way. And if you lend so much money that his failure to repay puts you in risk of going bankrupt yourself, then people will really think you're irresponsible...
This is a fundamental tenet of what lending is all about. It's why a bank won't just give money to anyone for any reason at all. It's something everyone has considered in their personal life on a micro level, at some point. Yet in certain contexts the very idea of a difference between responsible and irresponsible lending, and accountability for same, goes right out the window. Conveniently when it does it always seems to be in support of funneling huge amounts of taxpayer money to large banks, or foisting indentured servitude on the bankrupt.
> investors will no doubt assume that financial institutions are state-guaranteed
They are state-guaranteed. Too big to fail. Every piece of financial machinery for the debt circus is required and they can't get rid of it or let it fail without exposing the same functionality elsewhere.
As long as we use a debt-based state currency the banks can't be allowed to fail. At some point they'll just print new money and start fresh hoping it doesn't happen again.
Until we declare the debt-currency game to be unwinnable and stop playing, we'll keep losing.
On the other hand I do feel that some of this sentiment is justified. After all the example of Italy (Bond markets demand high risk premiums, Italy announces much needed reforms, ECB buys Italian bonds, Italy removes reforms) is quite telling. The same (much worse, actually) applies to the financial institutions. What precedent have we set by bailing almost all of the out. Without a lot of reform investors will no doubt assume that financial institutions are state-guaranteed, allowing them to continue the tails I win, heads you (the state, taxpayers) loose game. Clearly more decisive action is required to deal with the current problems but I think we are deluding ourselves if we believe that we can make it out of this debt crisis only by clever policies.