Greece Vs EU

[PedroMendez]

A: *evil austerity; we need to spend more money*
B: "but you have spent more than countries that do a lot better for over 17 years. When excessive spending is the solution, why do you have any problems in the first place?"
A: "we need to spend more money"
B: "how much more and how is it going to solve any problem?"
A: "more spending!"
B: "...."

Having one of the most expensive pension systems in the world, having a relative high minimum wage and having an extremely bloated and overpaid bureaucracy and spending crazy on the military are obviously all signs of "harsh austerity".

From 2001 to 2007 their average wage increased by 65% while having 28% real GDP growth. In reality, the gap is even bigger, but I don't have the time to include secondary effects. In 08 and 09 - after the financial crisis started - public wages increased by another 19%, while real GDP shrank already by about 5%. No wonder, that their economy is going down the drain. They are just way to expansive for their productivity. They'd need to cut their average wage in half, if they'd want to compete with Poland....thats how bad it is.

 

[barros]

A: *evil austerity; we need to spend more money*
B: "but you have spent more than countries that do a lot better for over 17 years. When excessive spending is the solution, why do you have any problems in the first place?"
A: "we need to spend more money"
B: "how much more and how is it going to solve any problem?"
A: "more spending!"
B: "...."

Having one of the most expensive pension systems in the world, having a relative high minimum wage and having an extremely bloated and overpaid bureaucracy and spending crazy on the military are obviously all signs of "harsh austerity".

From 2001 to 2007 their average wage increased by 65% while having 28% real GDP growth. In reality, the gap is even bigger, but I don't have the time to include secondary effects. In 08 and 09 - after the financial crisis started - public wages increased by another 19%, while real GDP shrank already by about 5%. No wonder, that their economy is going down the drain. They are just way to expansive for their productivity. They'd need to cut their average wage in half, if they'd want to compete with Poland....thats how bad it is.

Do you know how Portugal is doing after the left went back to power?

 

[berbatrick]

A: *evil austerity; we need to spend more money*
B: "but you have spent more than countries that do a lot better for over 17 years. When excessive spending is the solution, why do you have any problems in the first place?"
A: "we need to spend more money"
B: "how much more and how is it going to solve any problem?"
A: "more spending!"
B: "...."

Having one of the most expensive pension systems in the world, having a relative high minimum wage and having an extremely bloated and overpaid bureaucracy and spending crazy on the military are obviously all signs of "harsh austerity".

From 2001 to 2007 their average wage increased by 65% while having 28% real GDP growth. In reality, the gap is even bigger, but I don't have the time to include secondary effects. In 08 and 09 - after the financial crisis started - public wages increased by another 19%, while real GDP shrank already by about 5%. No wonder, that their economy is going down the drain. They are just way to expansive for their productivity. They'd need to cut their average wage in half, if they'd want to compete with Poland....thats how bad it is.

I'm guessing the normal response for a country would be to first deflate their way out, but that's doubly difficult because, obviously, the euro, and also because they import a lot of basics? I'm also assuming that if wages have been inflated for long, so are prices?

Edit: isn't their public sector also a large employer? I really don't see a way out of this for them, other than defaulting and starting from zero (but based on what industry I don't know!)

 

[Stanley Road]

Having jobs for the zillion unemployed would help to fill the coffers but thats just a start

 

[PedroMendez]

Do you know how Portugal is doing after the left went back to power?

European officials are trying to ignore Portugal, because they don't want to have a public crisis in another country. Overall they have the same problems like Greece; their numbers look slightly better, but the problem is the same. They didn't overspend equally extremely and in 2013 (for some reason that is the last data point for some of the data...) their net consumption was "just" about ~100%. For a moment things looked like they might stabilize, but I am fairly certain from other data, that the situation got worse again.
Their debt-to-GDP ration is not as bad as Greece's one, so the EU is turning a blind eye to them running up the score at the moment. It is almost like hush-money.

A) Joining the Euro decreased interest rates for many countries
B) Cheap credit created bubbles, that made the economy look good for a while. (massive malinvestment = resources were wasted)
C) Governments (especially in Greece, but the same goes for Portugal) massively increased wages for their employees and increased the number of public employees.
D) This put strong upward pressure on wages in the private sector. The wages in the private sector increased a lot faster than productivity. All of that works well for a couple of years.
C) Reality kicks in. Once debt growth slows down, the whole thing crashes. (the US crisis was the spark)
D) Countries have to deflate to become competitive again. Usually that happens via the devaluation of the currency, but that is impossible within the Euro. So countries would actually need to cut the wages and public spending. That is politicly almost impossible, because it kills any government. Countries like Greece and Italy deflated by ~10ish% during the last 5-6 years (Portugal imo 4-5%), but they'd have to double or tipple that to become competitive again.

I'm guessing the normal response for a country would be to first deflate their way out, but that's doubly difficult because, obviously, the euro, and also because they import a lot of basics? I'm also assuming that if wages have been inflated for long, so are prices?

wages grew alot faster than prices, but Greece had also about 3-3,5% price-inflation each year till 08/09 (Portugal a bit less). Afterwards you had a couple of very erratic years (maybe problems with measuring inflation? maybe just chaos) and deflation till 2012/13.


I might seem very critical towards these countries, but I fully acknowledge that their challenge is impossible without leaving the euro. No government in any developed country could do whats necessary. It is too painful. Leaving on their own would be possible, but it would also create a lot of short-term pain. Consequently they are willing to make a bargain with the devil ("troika") even so that is no solution at all. The countries that offered to finance the uncompetitive systems of various Mediterranean countries are at fault. The "Troika" essentially trapped them inside, because they gave these countries the option to stay in the Euro. Especially Merkel is guilty. To my semi-official knowledge she overruled the German finance minister, who was already preparing for Greece to leave in ~2010.

 

[PedroMendez]

Having jobs for the zillion unemployed would help to fill the coffers but thats just a start

well. Nobody is willing to employ them for their current wage. It is too far above the market-clearing equilibrium. Simple as that. No amount of public investment can change that.

 

[Don't Kill Bill]

There is an underlying problem in the EU which it is politically unable to deal with. Greece may be the worst case right now because it genuinely shouldn't have been allowed to join the Euro but it isn't an isolated case.

Germany is using the Euro to undervalue its exports and is running an 8% to 9% trade surplus. The EU rules are that it shouldn't be above 6% and that is undermining the weaker economies in the Euro. Even the German govt admits that its exports are undervalued by 20%.

Portugal, Italy, Greece etc can't compete and there is no reason to think this will change.

The IMF think Greece can never pay the current debt burden off and lending more money to increase that debt burden is nonsense. The German govt will not allow debt to be written off. If Greece falls out of the Euro then the markets will attack the next weakest country and the banks holding Greek debt could fold causing another banking crisis.

So everyone has to pretend it makes sense to carry on bailing the Greeks or the system out, depending on your viewpoint. It can't last for much longer, something is going to have to give.

 

[PedroMendez]

There is an underlying problem in the EU which it is politically unable to deal with. Greece may be the worst case right now because it genuinely shouldn't have been allowed to join the Euro but it isn't an isolated case.

Germany is using the Euro to undervalue its exports and is running an 8% to 9% trade surplus. The EU rules are that it shouldn't be above 6% and that is undermining the weaker economies in the Euro. Even the German govt admits that its exports are undervalued by 20%.

Portugal, Italy, Greece etc can't compete and there is no reason to think this will change.

The IMF think Greece can never pay the current debt burden off and lending more money to increase that debt burden is nonsense. The German govt will not allow debt to be written off. If Greece falls out of the Euro then the markets will attack the next weakest country and the banks holding Greek debt could fold causing another banking crisis.

So everyone has to pretend it makes sense to carry on bailing the Greeks or the system out, depending on your viewpoint. It can't last for much longer, something is going to have to give.

the solution would be reasonably simple: Create a formal mechanism that allows countries to leave/join the currency union, prohibit any bail-outs and change the rules for the settlement of national accounts. Non of that would be particularly difficult. Yes, 3-5 countries would leave the Euro but afterwards you'd end up with a very healthy currency union that would be very attractive for almost all neighbours.
To think that the German government is willingly undervaluing the euro is simply nonsense. The Bundesbank is just getting overruled in the ECB all the time for almost a decade now (German hegemony doesn't seem to count for much). Yes, the German exporting industry is benefiting from this, but they'd be fine anyway. The average German person doesn't even realize how much wealth he loses due to this. We are talking about multiple billions of € that are redistributed each year without much debate about that.
Additionally the problem for Greece is not the debt burden, but them still consuming a lot more than they create. Lending money to extremely generous terms (low interest rates + long durations) is the equivalence to a haircut on debt. So Germany already wrote off part of the debt. It just did it in a way, that is hiding this from the German electorate. Sadly that is just not enough. As I explained previously: The consumption of Greece is completely out of control. You can look up all the data by yourself, if you don't trust me. Eurostat and AMECO are just two clicks away.
Only politicians talk about "countries getting attacked by the market" to deflect from their own failings (blaming bankers and capitalism is quite sexy nowadays). That phrase is complete nonsense. The honest statement would be: Markets are only willing to lend money to bankrupt and irresponsible countries, if other European institutions are willing to give guarantees. That is hardly surprising.

 

[Stanley Road]

Pedro do you work in a bank by chance?

Cos if wreckless lending wasnt part cause for the crash then i dont know what was.

Just as wreckless lending to greece is madness.

 

[PedroMendez]

Pedro do you work in a bank by chance?

Cos if wreckless lending wasnt part cause for the crash then i dont know what was.

Just as wreckless lending to greece is madness.

There are two sides and both are at fault. You take away the agency from one side, because it doesn't fit your narrative. The Greek government is responsible for their own actions and Greeks elected them fair and square. They have a choice; they just don't like to pick "out".

 

[Stanley Road]

There are two sides and both are at fault. You take away the agency from one side, because it doesn't fit your narrative. The Greek government is responsible for their own actions and Greeks elected them fair and square. They have a choice; they just don't like to pick "out".

Well all european countries are at fault for adopting neoliberalist policies or having them forced down their throat.

There are actuallycountries that save in the good times and invest during bad times to create jobs, unfortunately the crazy currency has taken away a tool to help recovery. So everyone has to devalue from within, a race to the bottom which pro people seem to accept and loathe at the same time.

 

[PedroMendez]

Well all european countries are at fault for adopting neoliberalist policies or having them forced down their throat.

There are actuallycountries that save in the good times and invest during bad times to create jobs, unfortunately the crazy currency has taken away a tool to help recovery. So everyone has to devalue from within, a race to the bottom which pro people seem to accept and loathe at the same time.

so you are just ignoring their agency. The very few countries that save in good times are ultra "neoliberal" so you probably hate them.

 

[Kasper]

A: *evil austerity; we need to spend more money*
B: "but you have spent more than countries that do a lot better for over 17 years. When excessive spending is the solution, why do you have any problems in the first place?"
A: "we need to spend more money"
B: "how much more and how is it going to solve any problem?"
A: "more spending!"
B: "...."

Having one of the most expensive pension systems in the world, having a relative high minimum wage and having an extremely bloated and overpaid bureaucracy and spending crazy on the military are obviously all signs of "harsh austerity".

From 2001 to 2007 their average wage increased by 65% while having 28% real GDP growth. In reality, the gap is even bigger, but I don't have the time to include secondary effects. In 08 and 09 - after the financial crisis started - public wages increased by another 19%, while real GDP shrank already by about 5%. No wonder, that their economy is going down the drain. They are just way to expansive for their productivity. They'd need to cut their average wage in half, if they'd want to compete with Poland....thats how bad it is.

Has even Syriza not cut into the military budget by now? Haven't followed the recent developments.

 

[TheRedDevil'sAdvocate]

Has even Syriza not cut into the military budget by now? Haven't followed the recent developments.

It's the one thing you can't criticize them for as they don't have the friendliest of neighbors living next to them. There has always been tension with Turkey, which has resulted to both countries having huge military budgets, but after the failed coup Erdogan's rhetoric has taken a very aggressive turn. Wherever he stands he questions the Lausanne treaty and he talks about "the borders of his heart" which hints to the Ottoman empire.

The Turkish parliament has declared a casus belli against Greece since the 70's and now Turkey has pre ordered 100 F35s (they cost more than 100 million dollars each) which can be a game changer in the area. What is Tsipras supposed to do? And we're talking about a radical left administration filled with Neo-Marxists, not some far right weirdos who thrive on making the best out of fake hot tensions and patriotic malarkey in order to control the people.

Greece is dead and buried. It signed its death certificate when the socialists rose to power in the 80s and found out that they could expand their base and stay in office by bloating the public sector and that they could create (back then) and retain a status quo by "favoring" certain business men and making them the big players in the private economy through (overpaid) public investments. And all hope was gone when the right realized that they had to follow this example, if they wanted to win the elections. They created a "working jungle" with basically no rights in the private sector and they made the people begging them for a job in the public sector where the money's better, the work is less and you can not be fired even if you don't show up for work. And i'm not talking about specialized professionals, like doctors, teachers, police etc., who have to work under very hard circumstances and with a very limited budget. I'm talking about people who get paid for sitting on a desk all day playing solitaire on the pc.

Back in 2010 Creece bankrupted and yet the men in power, all of them left and right, decided to destroy what little was left of the real economy and protect "this" public sector. Why? Because these people get them elected.

 

[Stanley Road]

so you are just ignoring their agency. The very few countries that save in good times are ultra "neoliberal" so you probably hate them.

Its keyensian economics not neoliberal

 

[Santi_Mesut_Alexis_87]

I just went through some data for work and found this beauty:

Greece’s „annual final consumption expenditure” was higher than their „net national income” since 2005. Between 2004 and 2008 they increased it from 95% to over 110%. Since 2009 it is oscillating between 110% and 115%.

So in short: for the last 13 years they are consuming a lot more than they are earning. Even after the crisis. That’s precisely the reason why Tsipras doesn’t want to leave the euro. All talk and accounting tricks aside, the numbers don’t lie. They’d need to cut their consumption by ~15-20%, if European taxpayers wouldn’t subsidies them. But obviously some people will continue to blame “austerity” for their problems. That’s a lot easier than facing the hart reality: In the long run you can only spend what you earn. They are responsible for their economic problems; not some obscure elite; not other European countries; not the banks.

While Greece has his own faults, like you said, it's clear austerity hasn't worked for them. They have already sacked many public employees and the private sector has very strict rules to employ and sack someone.

 

[PedroMendez]

While Greece has his own faults, like you said, it's clear austerity hasn't worked for them. They have already sacked many public employees and the private sector has very strict rules to employ and sack someone.

Call it what you want. Nobody is (or should be) surprised that their reforms are not working. Instead of breaking up their public sector and liberalising the private sector, they started to raise taxes. As if the state is not already way too big (relative to their economy). Thats just another attempt to maintain the privileges that they created in the past. Literately exactly the opposite of what they should do.
The irony of all of this is, that once you'd reform the country, you'd have 1-2 years of pain, but afterwards almost immediately a boom. Thats fairly well established and documented. They'll suffer till the end of the days with their current approach.

 

[Santi_Mesut_Alexis_87]

The EU has asked them to raise taxes. The same thing happened to us with Mario Monti.
No, it's not proven. Even the IMF said austery has failed.

 

[Don't Kill Bill]

the solution would be reasonably simple: Create a formal mechanism that allows countries to leave/join the currency union, prohibit any bail-outs and change the rules for the settlement of national accounts. Non of that would be particularly difficult. Yes, 3-5 countries would leave the Euro but afterwards you'd end up with a very healthy currency union that would be very attractive for almost all neighbours.
To think that the German government is willingly undervaluing the euro is simply nonsense. The Bundesbank is just getting overruled in the ECB all the time for almost a decade now (German hegemony doesn't seem to count for much). Yes, the German exporting industry is benefiting from this, but they'd be fine anyway. The average German person doesn't even realize how much wealth he loses due to this. We are talking about multiple billions of € that are redistributed each year without much debate about that.
Additionally the problem for Greece is not the debt burden, but them still consuming a lot more than they create. Lending money to extremely generous terms (low interest rates + long durations) is the equivalence to a haircut on debt. So Germany already wrote off part of the debt. It just did it in a way, that is hiding this from the German electorate. Sadly that is just not enough. As I explained previously: The consumption of Greece is completely out of control. You can look up all the data by yourself, if you don't trust me. Eurostat and AMECO are just two clicks away.
Only politicians talk about "countries getting attacked by the market" to deflect from their own failings (blaming bankers and capitalism is quite sexy nowadays). That phrase is complete nonsense. The honest statement would be: Markets are only willing to lend money to bankrupt and irresponsible countries, if other European institutions are willing to give guarantees. That is hardly surprising.

As long as Germany remains the most productive economy inside the Euro it benefits from the weakness of the other nations pulling down the Euro's value. It is immune to the normal break on competitiveness which is strengthening currency value followed by offshoring.

Why is it that Germany can break the 6% rule and nothing is done about it?

OK, attacked may be the wrong term but you know what I mean. If Greece falls out of the Euro what price would you put on it being the only country to do so and what do you think happens to the banking system across the EU which would then have massive defaults on their loans?

 

[sun_tzu]

what do you think happens to the banking system across the EU which would then have massive defaults on their loans?

Not a lot actually...
I believe for example the German government has around the same exposure as all the banks put together... France not too far behind and several eu governments with an exposure higher in gdp terms than Germany
I suspect the banks would manage and indeed would not be allowed to fail... with the possible exception of Greek banks though by that stage they probably wouldn't technically be part of the eu banking system

http://www.madhyam.org.in/wp-content/uploads/2015/07/BBC.png

UK banks may also take a big hit proportionally as well... again these may well not be considered part of the eu banking system if / when Greece goes pop

 

[Don't Kill Bill]

Not a lot actually...
I believe for example the German government has around the same exposure as all the banks put together... France not too far behind and several eu governments with an exposure higher in gdp terms than Germany
I suspect the banks would manage and indeed would not be allowed to fail... with the possible exception of Greek banks though by that stage they probably wouldn't technically be part of the eu banking system

If it's just Greece then possibly but if Greece leaving puts pressure on Spain and Portugal, for example, the whole thing turns into a mess very quickly and even the hint of contagion drops bank stocks which Italy needs like a hole in the head.

 

[PedroMendez]

As long as Germany remains the most productive economy inside the Euro it benefits from the weakness of the other nations pulling down the Euro's value. It is immune to the normal break on competitiveness which is strengthening currency value followed by offshoring.

Why is it that Germany can break the 6% rule and nothing is done about it?

OK, attacked may be the wrong term but you know what I mean. If Greece falls out of the Euro what price would you put on it being the only country to do so and what do you think happens to the banking system across the EU which would then have massive defaults on their loans?

It is a myth that an undervalued currency is benefitting a country in the long run. Germany can break the 6% rule, because all countries break rules all the time both in the EU and in the Eurozone. That’s one of the fundamental problems of the euro. To be more accurate: That is the fatal problem. Additionally it is a quite interesting way to approach the problem. Germany getting less productive won’t solve the problems in Greece, Portugal or Spain.

After establishing an official mechanism that allows countries to leave the EU, at least 2-3 countries will leave. At that point the other countries will realize that they have to adapt reasonable reforms that strengthen their economy. They’ll be very motivated to do so, because dropping out isn’t nearly as attractive as you might think; dropping out and devaluating one’s own currency isn’t some kind of miracle cure. It is the same pain, just in a way that is more viable/practical.

The majority of Greek bonds are in the hands of the central banks and countries. They’ll take the hit. Their mistake to buy this junk. Regardless of how long you wait, these bonds will stay worthless. Numbers on a paper. At one point or another European countries have to address the problems in their banking sector anyway. The sooner that happens, the better.

 

[Stanley Road]

If Greece falls out of the Euro what price would you put on it being the only country to do so and what do you think happens to the banking system across the EU which would then have massive defaults on their loans?

As Ive said previously, in my opinion Greece defaulting on debts will have far greater shockwaves than Brexit will.