Spain's Economic Minister Needs a Swift Kick Up His Arse!

[jjsto]

"My point was that Spain shouldn't be tossing around blame, when it's blatantly obvious that Spain's problems, and most definitely Greece's problems, were due to the culture, excesses and reliance on social benefits within their own countries. "

 

"No one asked Ireland, Spain, Portugal or Greece to spend billions in excess of what could be supported by their GDP."

 

I disagree with both of these statements with respect to Spain.  Spain, in my mind, is not like Greece at all.  They didnt use derivatives to hide their debts, they dont have the same level of corrupt culture, and their debt/gdp is around half of Greece right now.  On the eve of the crisis (2007) Spain ran a budget surplus and had a debt to GDP ratio below 40%.  Yes, they had a huge housing bubble and no one "forced" their population to buy too expensive homes.  But, house ownership in Spain is one of the highest in the world at +80% and over 70% of household net worth is in homes.  Loans in Spain are not non-recourse.  Given that Spain had one of the largest real estate collapses in europe, it is no wonder that the economy was thrown into a "balance sheet" recession as most individual's balance sheets are impaired and cant be fixed by foreclosure.  28% of all homes built from 2001-2007 are vacant.  Their government was just as blind during the build up of the real estate bubble up as was the US government.  Unemployment is currently 25% (and over 50% for youth) and they don't have their own currency to devalue or use as a lender of last resort.  What government could have fiscally survived a collapse like that without dramatically running a deficit? And what evidence is there that austerity applied to those conditions has any chance of working? 

 

[PlanMaestro]

"blaming the real estate bubble all on Spain when German money was all behind this."

 

Why should German money be the cause of the real estate bubble in Spain?  :)

 

Not sure if this question is real or sarcastic, but here is the answer from one of the links in today's Krugman post:

 

http://krugman.blogs.nytimes.com/2012/02/25/european-crisis-realities/

 

What we’re basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe. It’s not a perfect fit — Italy managed to have relatively high inflation without large trade deficits. But it’s the main way you should think about where we are.

 

And the key point is that the two false diagnoses lead to policies that don’t address the real problem. You can slash the welfare state all you want (and the right wants to slash it down to bathtub-drowning size), but this has very little to do with export competitiveness. You can pursue crippling fiscal austerity, but this improves the external balance only by driving down the economy and hence import demand, with maybe, maybe, a gradual “internal devaluation” caused by high unemployment.

 

Now, if you’re running a peripheral nation, and the troika demands austerity, you have no choice except the nuclear option of leaving the euro, coming soon to a Balkan nation near you. But non-GIPSI European leaders should realize that what the GIPSIs really need is a general European reflation. So let’s hope that they get this, and also give each of us a pony.

[PlanMaestro]

To put some humor into this:

 

This is how the Germans think about the negotiations:

http://www.youtube.com/watch?v=hsHWZHaqe1Y (Sopranos)

 

But the situation is more like this:

(Inglorious Bastards)

 

[Sportgamma]

The downside of being so rhetorically aggressive is that wounded parties don't want to listen:

http://krugman.blogs.nytimes.com/2012/06/01/the-breakeven-point-wonkish-but-terrifying/?smid=tw-NytimesKrugman&seid=auto

 

Paul McCulley held a similar viewpoint and received walking papers from PIMCO for his perspective. Every country can point to unique villains (Greenspan) so it takes a while to see common threads.

 

 

I think the central theme here is the mundel-fleming trilemma. As you do not have a floating currency, you have to look at the flow of funds between countries within the Euro.

 

This presentation from Richard Koo is very helpful (he talks about the Eurozone after 12 minutes):

 

 

[PlanMaestro]

I think the central theme here is the mundel-fleming trilemma. As you do not have a floating currency, you have to look at the flow of funds between countries within the Euro.

 

Mundell's impossible trinity:

http://en.wikipedia.org/wiki/Impossible_trinity

[Sportgamma]

In order to understand why EMU happened, we often turn to the familiar Mundell-Fleming monetary policy trilemma. Given intra-European capital mobility, the decision by a subset of EC members to move to EMU was a logical, if radical response to the challenges posed by this trilemma. However, the institutional framework of EMU is seriously flawed. For decades economists have argued that fiscal union was a desirable, and perhaps indispensable, complement to EMU. What we now know is that a common eurozone framework for regulating financial institutions, and dealing with the consequences of their failure, is equally important. We have a monetary union with neither of these complementary institutions, and it is clear that this architecture is not fit for purpose. How did we end up here, and what happens now?

 

http://www.eurointelligence.com/eurointelligence-news/home/singleview/article/a-tale-of-two-trilemmas.html?no_cache=1

[Aberhound]

It is a mistake to talk about the problem as it is framed in the press. The problem is not about countries. During the boom some people got extremely rich and were able to guide government policy to their benefit. They are using that power now to get innocent people who happen to be taxpayers in countries like Spain and Ireland to pay higher taxes now and in the future to bail out the mistakes of these rich folk.

 

Complicating the problem is that this concentration of wealth creates a vicious circle. The rich get richer as the innocent get squeezed. The squeeze is made worse by effective rent seeking by the rich creating high cost power and toll roads etc.. The concentration of wealth means that consumption decreases both because the rich consume proportionately less and because the rich spend a greater proportion of their wealth outside the country and move more money offshore. The rich pay less tax proportionately through better "tax structuring" so governments get less tax revenue and fire more middle class workers. You end up will less local demand and a growing class of long term unemployed dependent on the kindness of others.

 

You have to stop the governments from intervening as this only results in more rent seeking. Look at the insanely stupid plan in the UK to reverse Thatcher's electricity market policies and replace it with a communist electricity system which will cause a massive transfer of wealth from the poor and middle class to the rich. It is not intelligent to add hundreds of billions in debt to uselessly convert from one type of power production to another chosen by some bureaucrat influenced by the rent seekers. Let the free market choose. If politicians sat on their hands the banks which were poorly run would go bankrupt and the bond holders would become the new owners of the banks. At least the concentration of wealth problem would improve somewhat. Politicians that want to meddle can find plenty of work reversing any policy that has resulted in successful rent seeking. Depressions are the best time for new businesses to be created so it is in the rent seekers own interest to allow the politicians to end this nonsense. 

 

Rent seeking is more successful the bigger the political system. The problem will only get worse if the political union gets larger and the politicians more remote. Why not do the reverse and return to the city states? Think Singapore. Cities should hold referendums, declare their independence and leave both the country and the EU. I would love to visit Milan after it is taken over by the Milanese.

[Sportgamma]

It is a mistake to talk about the problem as it is framed in the press. The problem is not about countries. During the boom some people got extremely rich and were able to guide government policy to their benefit. They are using that power now to get innocent people who happen to be taxpayers in countries like Spain and Ireland to pay higher taxes now and in the future to bail out the mistakes of these rich folk.

 

I disagree with you. I´m more of the Popper-ian perspective (http://lachlan.bluehaze.com.au/books/popper_open_society_vol1.html). Our brains are hardwired to look for cause-and-effect connections and therefore it is logical for us look for some protagonist with a bad motive if something bad happens. But bad things can happen even if the ones involved had good intentions.

 

I live in Iceland and after the collapse public debate has been severely distorted. A large part of the population simply assumes that if someone is wealthy he must be involved in something criminal or at least immoral. It is a strange atmosphere and one in which totalitarian views thrive in. It has come to a point that the authorities are allowed to wiretap people who accused of crimes against property (as opposed to wiretapping people who are under suspicion of committing a crime).

 

In this case, I am of the opinion that it is indeed about countries and a system put up for the wrong reason and without taking the possibility of very bad outcomes fully into account. 

 

 

[SharperDingaan]

We all need to realize - that the more misery, the more the Euro devalues, & the more Germany benefits. They make the widgets, they reap the margins, every FX downtick makes the widgets cheaper, & they have the employment. It is not in the German, or Euroland interests, to break up.

 

Euroloand substituted population for FX movement. You move to where the jobs are, & ‘retire’ to your home country (state) when you’re done working – same as in the US. The age profile of the North underpins labour flow from the South to the North, & remittances from the North to the South. Northerners vacationing in the South add to the net wealth transfer.

 

The wealthier the North the more ‘2nd homes’ in the South, & the more Northerners  retiring in the South. The result is more homebuilding  in the South, and a market for the labour of those older Southerners who can meet the needs of those older Northerners who have moved south.       

 

The real discipline is eviction from the magic circle. Members are expected to break the rules, but the egregious end up dead; same as everyone can drive 20km over the speed limit, but if you drive at 50+ over the limit & like to weave in/out of traffic  - the odds are that you will have a short life. Eviction is the cure to moral hazard, & it is in the Northern interests to enforce it.

 

In the old days Europe regularly had brutal wars, diseases, etc. that keep the population reasonably in check. The young & the old were regularly culled -& both sides lost much of their productive capital stock. For those who lived, the result was favorable population pyramids, scarcity driven innovation (overcoming labor shortages), & rapid replacement of capital with state-of-the-art machinery and processes;  extended bursts of massive productivity that dramatically improved the standard of living. Most recognize that the old days were a little extreme. 

 

Until older folks die off at a faster pace than they are created, slow/no growth in Europe is almost guaranteed – & it is really no different to Japan. When Japan’s miracle collapsed, much of the workforce > 50 was forcibly retired, & never worked again at anything remotely approaching its previously productivity; the new additions outpaced the morbidity rate for years, & Japan had to implement successive rounds of stimulus to achieve just slow growth. 

 

Euroland is going to remain; if only to ensure that Europe remains at peace (not its natural state). The demographics will do its thing, & some members will get evicted - so expect volatility.

 

 

[Guest longinvestor]

We all need to realize - that the more misery, the more the Euro devalues, & the more Germany benefits. They make the widgets, they reap the margins, every FX downtick makes the widgets cheaper, & they have the employment. It is not in the German, or Euroland interests, to break up.

 

Euroloand substituted population for FX movement. You move to where the jobs are, & ‘retire’ to your home country (state) when you’re done working – same as in the US. The age profile of the North underpins labour flow from the South to the North, & remittances from the North to the South. Northerners vacationing in the South add to the net wealth transfer.

 

The wealthier the North the more ‘2nd homes’ in the South, & the more Northerners  retiring in the South. The result is more homebuilding  in the South, and a market for the labour of those older Southerners who can meet the needs of those older Northerners who have moved south.       

 

The real discipline is eviction from the magic circle. Members are expected to break the rules, but the egregious end up dead; same as everyone can drive 20km over the speed limit, but if you drive at 50+ over the limit & like to weave in/out of traffic  - the odds are that you will have a short life. Eviction is the cure to moral hazard, & it is in the Northern interests to enforce it.

 

In the old days Europe regularly had brutal wars, diseases, etc. that keep the population reasonably in check. The young & the old were regularly culled -& both sides lost much of their productive capital stock. For those who lived, the result was favorable population pyramids, scarcity driven innovation (overcoming labor shortages), & rapid replacement of capital with state-of-the-art machinery and processes;  extended bursts of massive productivity that dramatically improved the standard of living. Most recognize that the old days were a little extreme. 

 

Until older folks die off at a faster pace than they are created, slow/no growth in Europe is almost guaranteed – & it is really no different to Japan. When Japan’s miracle collapsed, much of the workforce > 50 was forcibly retired, & never worked again at anything remotely approaching its previously productivity; the new additions outpaced the morbidity rate for years, & Japan had to implement successive rounds of stimulus to achieve just slow growth. 

 

Euroland is going to remain; if only to ensure that Europe remains at peace (rnot its natural state). The demographics will do its thing, & some members will get evicted - so expect volatility.

 

Agree wholeheartedly with SharperD. I lived in Germany during the transition to the Euro and the talk there was that the Euro was an interim demographic play, it bought about a decade of access to new markets where the northern states got to write the rules of the new Game. The elephant in the room is however the lack of political will to take up sensible immigration policies to offset the demographic time bomb. EU will get weaker until this central issue is addressed.

 

[Zorrofan]

It may be that each of you has one piece of the puzzle. Europe has a multitude of problems and no one issue is by itself the total cause of the current situation. Europe has a common currency but not a monetary union, a collection of 27 different countries - each with their own subset of issues, and no common government body with the power to deal with the problems they face, some countries such as Spain and Greece have high unemployment while others like Germany don't. Imagine how the US response in 08/09 would have differed if, instead of a Federal Reserve and Congress, each proposed solution had to be passed by each state government and all 50 states had to be in agreement. 

 

cheers

Zorro

[PlanMaestro]

George Soros tries his best to be sympathetic and persuasive.

http://www.georgesoros.com/interviews-speeches/entry/remarks_at_the_festival_of_economics_trento_italy/

 

 

But the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany. It would leave Germany with large unenforceable claims against the periphery countries. The Bundesbank alone will have over a trillion euros of claims arising out of Target2 by the end of this year, in addition to all the intergovernmental obligations. And a return to the Deutschemark would likely price Germany out of its export markets – not to mention the political consequences. So Germany is likely to do what is necessary to preserve the euro – but nothing more. That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments. That would turn the European Union into something very different from what it was when it was a “fantastic object” that fired peoples imagination. It would be a German empire with the periphery as the hinterland.

 

I believe most of us would find that objectionable but I have a great deal of sympathy with Germany in its present predicament. The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.

 

We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.

 

[PlanMaestro]

How lucky we are to have had Martin Wolf as the Financial Times economics columnist over the last decade. A lonely sane and courageous voice. And now he is trying to be emphatic ...

 

http://www.ft.com/cms/s/0/4fe89d8c-a8df-11e1-b085-00144feabdc0.html#ixzz1wmjFXRZN

 

Now turn to the second issue: how does Germany want the eurozone to be organised? This is how I understand the views of the German government and monetary authorities: no eurozone bonds; no increase in funds available to the European Stability Mechanism (currently €500bn); no common backing for the banking system; no deviation from fiscal austerity, including in Germany itself; no monetary financing of governments; no relaxation of eurozone monetary policy; and no powerful credit boom in Germany. The creditor country, in whose hands power in a crisis lies, is saying “nein” at least seven times.

 

How, I wonder, do Germany’s policy makers imagine they will halt the eurozone’s doom loop? I have two hypotheses. The first is that they believe they will not. They expect that life for some of the vulnerable economies will become so miserable that they will leave voluntarily, thereby reducing the eurozone to a like-minded core, and lowering risks to Germany’s own monetary and fiscal stability from any pressure to rescue the weak economies. The second hypothesis is that the Germans really think these policies could work. One possibility is that the weaker countries would have so big an “internal devaluation” that they would move into large external surpluses with the rest of the world, thereby restoring economic activity. Another possibility is that a combination of radical structural reforms with a fire sale of assets would draw a wave of inward direct investment. That could finance the current-account deficit in the short run, and generate new economic activity in the longer run.

 

Maybe German policy makers believe that it will be either harsh adjustment or swift departure. But “moral hazard” would at least be contained and Germany’s exposure capped, whatever the outcome.

 

Yet the “exit of the weak” option looks very risky and the “painful adjustment and fire-sale” option so implausible as to lead swiftly back to exit. The danger, moreover, is not just to the weaker countries. Germany sends just 5 per cent of its exports to China, compared with 42 per cent to the rest of the eurozone, much of which would be disrupted by a meltdown. What has already happened has weakened its export-dependent economy: German GDP was only 1 per cent higher in the first quarter of 2012 than four years earlier. Beyond these narrowly economic dangers from damage to the “irrevocable” union would surely lie an enduring political disaster for the eurozone’s economic hegemon.

 

In brief, the eurozone is now on a journey towards break-up that Germany shows little will to alter. This is not because alternatives are inconceivable. What is needed is to turn some of the Nos into Yeses: more financing, ideally via some sort of eurozone bond; collective backing of banks; less fiscal contraction; more expansionary monetary policies; and stronger German demand. Such shifts would not guarantee success. But they would give the eurozone at least a chance of avoiding the cost of partial or total break-up. To work in the long run, such shifts would also require greater political integration.

 

In October 1939, Winston Churchill said: “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” The key in Europe today is Germany’s perception of its national interest. Once it becomes evident that their conditions will not work, German leaders will have to choose between a shipwreck and a change in course. I do not know which Germany will choose. I do not know whether its leaders know. But on that choice hangs the fate of Europe.