Germany vs Greece. The end game?

It looks like it’s crunch time. Either there will be some last minute cobbled together agreement to prolong the agony, or Greece will be forced to leave the Eurozone. Most neo-liberals take the simplistic view that Greece borrowed the money and has an obligation to repay come what may.

When bankers issue loans they have to be sensible and only issue loans to creditworthy customers. If the customer cannot repay the days when they were placed in a debtors prison are long gone. In any case we should not look at macroeconomic problems in microeconomic  terms. Germany has a net annual surplus of over €200 billion which, by definition, it is not re-spending. Another few billion euros, extracted under duress from Greece, would make no difference whatever to the living standard of German workers – many of whom are not at all well paid.

It would make much more difference if Germany moved to abolish its trade surplus. That would certainly increase living standards in Germany and also allow Greece and others to trade their way out of their debt problem.

Germany has been foolish in several ways. Foolish to lend the money, but also foolish in not understanding the basics of macroeconomics. Prof. Yanis Varoufakis reports that he’s done his best to explain some basic theory to their supposed brightest and best but the more he tries the more upset they become!

Simply, they don’t understand that there are consequences to running an annual surplus of over €200 billion. Where do the Germans think those euros come from? They cannot print them themselves like they could with the DM. They cannot come from the UK or USA. They pay for German exports in £ and $.

They have to come from other euro using countries which means they don’t have enough euros left to run their economies properly. It’s not just Greece. Albeit to a slightly lesser extent it’s Italy, Spain, France etc too.

Alternatively, they have to be created by the ECB or by the Bundesbank  with ECB approval. So if the ECB can do that for Germany, why not for Greece?

The British left needs to discuss more than the UK’s membership of the EU.

As the EU debate swings into life in the UK we’ve so far heard the most from the business sector who have been most pro in their advocacy of the UK’s continued membership. It is perhaps quite natural that big business would like the EU to remain as it is. Those on the traditional left would say that’s because they want to have a large pool of unemployed workers to keep wages down and maintain worker discipline!

Are they correct in saying that? As things are at the moment it is hard to say they aren’t. It is hard for big business to argue that they only want the EU for its expanded, but much depressed, market.

The modern supposedly progressive left has been seduced by the powers-that-be in the EU into thinking the EU to be a socially progressive organisation too. Recent events in Greece, for example, are shaking that view. That needs  to be shaken  some more. A first step would be to get them to actually discuss the problem. We might well think the election of Syriza in Greece, with its band of ex-Maoists, ex- Trotskyites, ex-Communists would be a topic of interest for them. Not so. They are shell-shocked into silence at the moment. The main Labour websites have nothing at all to say on that.

Anyone believing in a united Europe, as many of our EU advocates clearly do, should feel as passionately about unemployed young people in Spain or poverty in Greece as they do about it in the UK. The progressive left  say they like everything about the current level of EU integration, and like the EU as it is. If they ever remember to make a critical comment, it is not because they wish to change anything or intend to vote against any of its measures.

If the UK today had ultra high levels of youth unemployment as the south of the EU currently suffers,  the progressives would never let anyone hear the end of it. Rightly so. There would be marches  from the most depressed areas to London to demand some action.

If the UK had Greek levels of unemployment, and a Greek cost of living crisis which has depressed average real incomes by almost a quarter since 2007, again we would not hear the end of it, as the ‘progressives’ would rightly think it completely unacceptable. If the unemployment in Greece or Spain had been brought about by a right wing military coup, again there would be uproar. So why is it that these people who believe in pan European solidarity have nothing to say about the scandal of poverty and joblessness in large areas of Euroland? Why are they not insisting on new policies for the EU?

Now’s a good time to be saying something about that in connection with the EU referendum. The British left needs to discuss more than the UK’s membership of the EU. It needs to discuss the EU itself too.

How to win and lose elections.

At the risk of the accusation of being  pretentious, I’ve never won or lost an election ever, I thought I’d deviate from my usual economic commentary and have a try at explaining why Labour did so badly in the recent UK elections and what needs to happen for them to do better in future. There  are are an awful lot of disappointed Labour supporters around, who might be looking for some answers as to why an expected Labour small win suddenly turned into quite a large Conservative win.  There’s probably many Liberal Democrat supporters feeling somewhat depressed too, but they don’t need any similar explanation!  Something went obviously very  wrong for Labour on polling day. Either those potential Labour voters who had indicated to the pollsters they would be voting Labour did not show up on the day, or they changed their minds at the last moment and voted for someone else. The pollsters sampling methods cannot be fundamentally wrong, otherwise their exit poll would not have been as close to the actual result as it was.

The Labour Party had enough potential votes to win, albeit with some support from the SNP, but not enough real or actual votes on the day. So what went wrong?  We need to start with the fundamentals. The Labour Party has a core set of socialist supporters. It can never win an election with just those supporters , though. There just aren’t enough of them. It needs to appeal to enough of another group, the uncommitted voters to get the numbers. There is also another group of voters who are hostile and are never likely to be won over no matter what policies are on offer.  They may as well be ignored. The temptation for any political party is to take its core support for granted and try to appeal to the undecideds or even the hostiles.  I would expect the Labour Party has spent quite a lot of money, over the years, with various marketing and PR companies, to set up focus groups to find out what policies might be popular with those groups and so tailor Labour policies to suit. That’s a big mistake. Anyone who needs a focus group to tell them their politics shouldn’t be in politics. In any case, votes are often not cast totally for the reasons the voter might care to explain to others.

Another mistake is to reason along the lines that because they’ve lost the election to a party offering more right leaning policies previously, that they need to do the same to win the next time, too. That’s not a sensible approach. Why would anyone want to vote for a supposedly socialist party offering conservative policies? Why wouldn’t they vote for the real thing? Parties have to be true to their principles. If they aren’t they risk losing their core supporters. In Labour’s case, to UKIP, the SNP, the Greens, one of the minor left parties or maybe even to the “Apathy party”.  They also risk appearing disingenuous to the uncommitted. Uncommitted voters will vote for politicians they can trust, even if they are not in total agreement,  or at least, distrust little enough for to make them actually turn out on the day. If a party or individual politician appears disingenuous they won’t get those votes even if the policies on offer are carefully tailored to match. There’s no chance of picking up much support from Tory voters even with Tory policies. They are the hostile voters.

Trust has to work both ways too. Labour has lost support to UKIP who have established themselves in second position in many of the Northern English constituencies. It was a big mistake to assume that the rise of UKIP was a good thing for Labour and that it would take more votes from the Conservatives than them. There are potential UKIP supporters in all parties. Whilst they might nearly all break ranks and vote UKIP in a bye election or the European elections,it makes much less sense for Conservative potentials to break ranks and vote UKIP in a general election. The Conservatives pledged that referendum. Labour didn’t see fit to trust the electorate on the EU question.

The full picture is not yet known but it would be a surprise if the reason for Ed Balls losing his seat in Leeds, for example, does not turn out to be that he lost more votes to UKIP than his Conservative opponent.That could have been so easily avoided if the party had said that, whilst it supported the UK’s membership of the EU, it recognised that the electorate needed to have their direct say now.  They needed to offer a clear-the-air referendum, and not just before more powers were ceded. There have been more than enough already. It would have been better to have that referendum under a Labour Government than Tory Government which is the way it is going to turn out.  Democratically elected governments can do pretty much what they choose except give away that democracy. There comes a time if too many powers are ceded, that a change of elected government, is not enough. The Greeks have just discovered that – the hard way!

The Labour Party also needs to remember its own name and the meaning of its own name. The party is meant to be the party of working people.  But do working people now view Labour as their party? They don’t see Labour people like themselves in any positions of influence,  or hear accents like their own, not in England at least. They see Labour standing up for the racially oppressed, the sexually oppressed, the gender oppressed, those oppressed, or disadvantaged, because of physical and mental handicaps,  but if they themselves are not in any of those categories, or don’t see themselves as fitting into those categories, they wonder why the party has forgotten about them. What about those who are oppressed simply because they don’t have any work or they don’t have anything better than a zero hours contract or they can’t find a home? Those workers may not have heard of Keynes, or any of the post Keynesian thinkers, who can well explain why austerity economics doesn’t work, but they just know instinctively, and from their own personal experience that it doesn’t. It also applies to everyone who has an unemployed son or daughter who may be well qualified academically but is unable to find a job to match those qualifications. As the SNP has demonstrated, an anti- austerity message is not at all incompatible with electoral success.

Messages and slogans have to be simple and understandable. The slogan “One Nation” may be simple but it isn’t at all understandable.  What does it mean? That we all live in one country? Well, so what? People don’t discuss politics in those terms. The Scots may have other ideas on that anyway. We don’t all have the same problems, that’s for sure! So there’s a disconnect there between the so-called metropolitan elites, who dream up  these slogans, or in this case use a Tory cast-off,  and ordinary voters. There have always been metropolitan elites. They are nothing new. The term has crept into use simply because of that growing disconnect.

The role of emotion in Labour politics should not be overlooked. Rational arguments will only get any politician so far. Labour victories used to be memorable for the feelings they generated as much as anything else. They generated an optimism for the future. I’m not sure Conservatives can say the same thing about their successes. Let’s get something of that back for future elections and start to win them on our terms.

Never mind the deficit just vote for the recovery!

It’s difficult to know who to back in next month’s UK elections. Europe is a major issue which the most normally sensible parties, or at least the parties who the public normally consider to be the more sensible,  have largely chosen to ignore  in the run up. The events in the eurozone are highly significant, in particular the Greek crisis,  yet those in the most pro-EU parties don’t want to talk about them at all.

There’s next to nothing about it on Labour’s main website, Labourlist, for example.

Funny that!  Those who believe in a united Europe, as many of our more ardent EU advocates clearly do, should feel as strongly about unemployed young people in Spain or poverty in Greece as about hardship in the UK.  Yet, if they ever remember to make a critical comment, it is not because they wish to change anything. The just expired Parliament has seen a complete absence of Labour opposition to any new laws or powers for the EU.

If the UK today had 50% youth unemployment as the south of Euroland currently suffers, Labour would never let us all hear the end of it – and rightly so. If the UK had Greek levels of unemployment, and a Greek cost of living crisis which has depressed average real incomes by almost a quarter since 2007, again we would not hear the end of it, as Labour would rightly think it completely unacceptable. So why is it that these people who believe in pan European solidarity have nothing to say about the scandal of poverty and joblessness in large chunks of Euroland? Why are they not insisting on new policies for the EU?

The situation is far from ideal but it’s probably best to vote for the party who you feel will produce the best recovery. The recovery, when it happens, will fix all deficit problems. Firstly a healthy economy will mean increased taxation revenue. Secondly, if the economy is healthy no-one is going to worry about debts and deficit anyway. The US$ is surging at present as investors buy up $ securities. Are they worried about a $17 trillion (or is it $18 trillion by now?) debt?

I don’t think so. There are those in the USA who can’t make head nor tail of it all and are pushing for a balanced budget. I can’t see them getting anywhere but heaven help us all if they do!

Germans don’t understand how currency unions need to function.

The economic clash between Greece and Germany is invariably portrayed as a clash of cultures. The majority of Germans resent what they see, and are assured by those who should know better, as a bailing out, at their expense, of those in the southern peripheral European countries who appear to be unable to manage their economic affairs as well as they can.

      

That seems a perfectly commonsensical point of view but raw ‘common sense’, as always, in economics cannot be relied upon to be the best guide. Our common sense is invariably derived from our own micro-economic experience. The principle that it is better to be in surplus than deficit, for example, works fine for us as individuals in the micro world, but taking a wider view, that commonsensical notion is inconsistent with the basic accounting principle that for every asset there has to be a debt. For every surplus there has to be a deficit. Not everyone can be in surplus and not everyone can be in deficit.

So we need to correct our ‘commonsense’. Physicists, like Angela Merkel who therefore can have no excuse,  are used to doing exactly that. They know that their commonsense viewpoints of the world will only take them so far. It fails completely after that. Anyone who has studied Maxwell’s equations, Quantum Mechanics or Einstein’s Relativity knows that these subjects can make your brain hurt! After a while, we have to come to the conclusion that it is better to try to understand via the mathematics of it all rather than understand completely.

It is nowhere near as bad in economics,  but still just a little lateral thought is required. The easiest way to understand what needs to happen in the single currency eurozone, is to make a comparison with what already does happen in a successful currency union.

Let’s take a look at how it all works in the USA. The United States has, as we all know,  a common currency but also  a Federal Government to conduct macroeconomic policy, and transfer surpluses from the wealthy parts of the US to the poorer parts. It transfers surpluses. It does not arrange loans, except perhaps for special projects. If it did, the wealthier parts of the USA would end up as massive creditors. The poorer parts would end up as massive debtors. There would be clashes between New Jersey, the wealthiest state, and Mississippi the poorest.  I had to look this up , by the way. I suspected that Mississippi might be the poorest but I had no idea which was the wealthiest. I had thought maybe California. That’s as it should be. It should not be like it is in the Eurozone where the wealthy states never tire of letting everyone else know who is paying the bills.

So, imagine New Jersey  providing big loans to an impoverished Mississippi, dictating that it implement  privatisation of public assets at knock down prices and drastic cuts to state spending, pensions, its education service etc to be able to repay those loans.  The Mississipians and the New Jerseyites would be saying exactly the same things about each other as the Germans and Greeks are saying now!

So, just as any transfer of funds between New Jersey and Mississippi has to be just that, ie a transfer and not a loan,  so too it needs to be between Germany and Greece in the Eurozone.

The German taxpayers may well not like that idea. It certainly would not have been properly explained to them just what they were letting themselves in for when the Euro was created. No politician in any of the Eurozone countries would have dared make that explanation! It would have been career suicide. There were economists around who did their best to explain it all but they weren’t listened too.

It is too late for that now, but the reality of what has been created, in their name now needs to be recognised and understood by all. Some rethinking is in order. That has to start with the Germans,  then the Dutch and then everyone else too. The sooner the better.

Classical economists don’t understand real people or real economies.

There is at last some evidence that the political mainstream is coming around to the idea that  “places {in the same currency zone -PM}  in deficit have to be easily financed by places in surplus”. At least there is,  if we can consider John Redwood, a British Conservative MP,  to be representative of the mainstream. He, himself, may well question that assertion, but nevertheless this  recent quote  shows that it isn’t just Greece’s Syriza and the political left who are making the argument.

John Redwood is, of course, meaning Germany although the same argument would apply to Holland who run an even bigger surplus, as a percentage of GDP than Germany. The Germans were always happy to finance their customers when they used the DM. They’d buy up the treasury bonds of the deficit countries, like the UK and US, and that way their surpluses were recycled to their customers by the process of government deficit spending. So why the problem now? From their POV now, they should be even keener to do that. It would keep “their” trade zone healthy. They could impose conditions , of course, but there would be no reason to impose such stringent conditions as they do.

They seem wedded to the idea that internal devaluations are now needed in the peripheral countries of the Eurozone. General devaluations are no longer possible within the common currency zone. But can internal devaluations work? We know external, or general, devaluations can work. Recently the Canadian dollar has fallen by about 20% against the US dollar. This isn’t particularly noticeable to Canadians until they cross the border into the US. Then they realise that their wages and salaries are now worth 20% less, in terms of US$, than before. Canadian prices, at least the ones unaffected by import costs, such as rents, in are now 20% less too. Imports from the USA are now 100*(0.2)/(1-0.2) =25% more expensive.

This shift is necessary for the Canadian economy to adjust to changing world conditions. But what would have happened if Canadians used the US$? Theoretically,  if Canadians had reduced all prices and all wages by the same amount, and IF spending patterns were left unchanged,  the outcome would be the same. I’ve used the big IF because IF prices were falling fast then the real level of interest rates would be very high, even if they were nominally zero, and which would make it irrational for any individual to spend more than they had to.

But would that have really happened? If Canadian companies had faced falling demands for their products, they would do what all companies do. They’d cut back. But there wouldn’t be pay cuts and price cuts. Maybe just no pay rises and no price rises. They’d lay off some of their staff and stop recruiting others. They would adjust to being 20% (or close to it) smaller in this way. That would be repeated right through the Canadian economy which would end up 20% smaller too. Unemployment would skyrocket and the US media would no doubt be making negative comments about the Canadians, especially if they’d dared say it was even partially the USA’s fault.

That’s exactly what’s happened in Greece, Spain and elsewhere. Except of course it is the Euro not the US dollar which is causing the problem.  Economists, of the classical variety, will argue that this should not have happened.  Some will be in complete denial and will argue that it can’t have happened, or if it has, it must be due to some other factor. Lazy Greeks maybe? They can , of course, show nice mathematical models of how an ideal economy would be able to restore its competitiveness if only people would just behave rationally – according to their definition of rationality. But real people behave rationally as they themselves see it, not how anyone else might see it. That needs to be understood by real economists too. Including real German ordo-liberal economists!

So instead of imposing austerity on countries like Greece and Spain, to force internal devaluations, the Germans need to find some new economic advisers who can come up with some other way to equalise the money flows. Otherwise, their dream of a united Europe will become ever more nightmarish as time passes.

 

Germany vs Greece: The battle commences!

Well done Syriza and well done Alexis Tsipras! The only way is up from here. Surely the economic crisis can’t get any worse for Greece! We’ll see.

The German population will have been fed a steady stream of disinformation on reckless, untrustworthy, lazy Greeks who agreed to borrow money they had no intention of ever repaying and which they have now squandered etc etc.  It’s all nonsense of course!

So where to now? If Greece’s creditors wish to see any of their money back, there has to be a recognition  that something has to change, and notwithstanding any useful improvements that might be made to the Greek taxation system, primarily that change has to come from the Germans and the EU governing class. The Germans, and others, have to realise that if they want to run a trade surplus, which they seem to like doing,  (it was about 7% of GDP the last time I looked), then they should be actively encouraging other countries, including Greece,  to run deficits. The larger their deficits the higher the German surplus.

Naturally, those trade deficits translate into government budget deficits too. That way the Greek government spends Euros into its economy so that ordinary Greeks will be able to afford more German imports and so further increase German trade surpluses.

If there sounds to be an element of  Alice-Through-The-Looking-Glass about all this, and that  everything is working backwards, that’s because there is. As Alice put it:

“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?”

Well, no not quite. And, neither do we quite see the point of Germany insisting that Greece and everyone else in  Euroland runs a surplus too.  How can Germany ever be repaid when it always wants to run its own, even bigger, surplus?  Why does it even care  about being repaid in money it can never spend? Germany, and German creditors,  can only ever be repaid when it decides to change its ways and run a deficit in trade and a deficit in its Government budget.

In the world of international trade, debts can only be repaid in things.  ie real goods and services. If Country A exchanges more things, for fewer things, with Country B, so putting Country B into debt, that debt can only be repaid, at some time in the future if Country B gives Country A more things than it gets back.

So, the battle isn’t just between Greece and Germany. It’s between German neoliberal economic stupidity, otherwise known as  ordo-liberalism,  and the idea of scientific rationalism.

As Alice, herself said:

“It would be so nice if something would make sense for a change! “

 

 

The Euro Cannot Survive Without Greece!

The consensus of opinion of the ‘great and good’ of European politics and economics is that the Euro can now survive perfectly well without Greece. The Germans aren’t going to succumb to blackmail this time as they did in 2012. They have since worked out what needs to be done.  If the Greeks want to go then ‘good riddance’ seems to be the underlying message.

http://www.dw.de/germany-prepared-to-let-greece-leave-eurozone-if-voters-reject-austerity/a-18169442

Have they really thought this through? Maybe they have and aren’t saying quite what they think. That’s probably why they are being so hard on Greece and are doing  their utmost to try to ensure Greek voters change their minds and vote for one of the ‘sensible’ and ‘responsible’ parties like New Democracy of course!

It will all change after the election result if Syriza win. The Greeks will get all they want and more besides. Sure, technically the Eurozone would probably be better off without Greece, but what if the Greek economy starts to improve once they have left the Euro? It can hardly do any worse. Economic output is some 25% below its 2007 peak. Unemployment is running at close to 30%.  Wages are down even for those lucky enough to have a job. There’s no possibility of any significant growth any time soon under the present economic system.

Anyone who understands MMT knows that the Greek economy is almost bound to improve after the initial shock of leaving. A new Greek currency will make the Greek islands ultra competitive. German, and other, tourists will flock there. The Greeks will need to take some lessons on board. They know they need to improve their taxation system. They know they can’t expect a free ride and they’ll have to do whatever it takes to make their new economy work. It should become a matter of national pride for Greece that it does work. That would wipe the smile off the faces of those smug and self righteous individuals  who have pointed the finger at Greece with accusations of laziness and other racially based slurs.  As the economy improves their currency will rise again, just like it did in Iceland after the shock of the 2008 events.

The powers-that-be in the EU will know this too, deep down. Their worry will be that Ireland, Spain, Portugal, and even France and Italy will see that being outside the Eurozone is working for Greece and will want to be outside too.

That would certainly bring about the end of the Euro. They can’t allow that. Or can they? We can only hope!

Neo-liberal thinking!

How many basic errors can you pick up in this posting?
http://johnredwoodsdiary.com/2013/12/21/rebalancing-the-economy-2/

To be fair to Mr Redwood, he does allow some reasoned criticism of his postings , but he didn’t allow this one past!

………………………………………………………………………………….

@Mr Redwood,

 “the same rules apply to a government as to a company or person” 

But they don’t! Not governments like the UK , Australia, USA, Japan etc who are in control of their own currencies. Companies and people are users of a currency. We have to get money before we can spend it. Governments are issuers of a currency. They have to issue the currency before anyone can spend it. Where else can we get it from? Any government which issues its own currency has to be in debt. If it isn’t, it means it hasn’t issued anything.

Governments like Greece are also users of a currency. Thay have exactly the problems you describe.

Governments which issue their own currency have to get it right. They should issue not too much. This causes inflation. They need to issue not too little either. This causes deflation or depression. People lose their jobs.

One mistake often made by sovereign currency governments is to try to peg their currencies to another currency- as with the examples you give (Argentina, 60′s and 70′s Labour governments) . They had to borrow at high interest
rates to try, usually unsuccessfully, to maintain that peg. They are losing a key advantage in having their own currency.

Mrs Thatcher’s government was originally much smarter and allowed the pound to fall close to parity with the US$ in the early 80′s. Life went on pretty much as normal and hardly anyone remembers this now. They haven’t forgotten the events of Black Wednesday though! That was again caused by the UK government trying and failing to maintain a peg with the DM. Big mistake!

The ‘unsustainable burden for future taxpayers’ argument is odd. Future taxpayers will consume the products of their future economy. They won’t be able to send anything back in time to us, and we won’t be able to leave them
anything much to consume directly. If at some future time the Chinese decide to spend some of their accumulated money, that will be good. If they decide to order lots of Rolls Royce jet engines, for example, politicians will
try to take credit for the order. It will be hailed as a good thing and of course it will be.

What we can leave future taxpayers is a successful and well functioning economy.

PS: and a clean and safe environment.