ECB and Inflation

[Martinus]

I like how this thread is now quite dead, given that Grexit is more likely now than ever.

[The Brain]

Ever?

[Sheilbh]

Just realised I'll be on a Greek Island when thir next IMF payment is due...

[grumbler]

Ever?

Stop posting in a dead thread! 

[Sheilbh]

Varoufakis writing for Project Syndicate:

A New Deal for Greece

ATHENS – Three months of negotiations between the Greek government and our European and international partners have brought about much convergence on the steps needed to overcome years of economic crisis and to bring about sustained recovery in Greece. But they have not yet produced a deal. Why? What steps are needed to produce a viable, mutually agreed reform agenda?

We and our partners already agree on much. Greece's tax system needs to be revamped, and the revenue authorities must be freed from political and corporate influence. The pension system is ailing. The economy's credit circuits are broken. The labor market has been devastated by the crisis and is deeply segmented, with productivity growth stalled. Public administration is in urgent need of modernization, and public resources must be used more efficiently. Overwhelming obstacles block the formation of new companies. Competition in product markets is far too circumscribed. And inequality has reached outrageous levels, preventing society from uniting behind essential reforms.

This consensus aside, agreement on a new development model for Greece requires overcoming two hurdles. First, we must concur on how to approach Greece's fiscal consolidation. Second, we need a comprehensive, commonly agreed reform agenda that will underpin that consolidation path and inspire the confidence of Greek society.

Beginning with fiscal consolidation, the issue at hand concerns the method. The "troika" institutions (the European Commission, the European Central Bank, and the International Monetary Fund) have, over the years, relied on a process of backward induction: They set a date (say, the year 2020) and a target for the ratio of nominal debt to national income (say, 120%) that must be achieved before money markets are deemed ready to lend to Greece at reasonable rates. Then, under arbitrary assumptions regarding growth rates, inflation, privatization receipts, and so forth, they compute what primary surpluses are necessary in every year, working backward to the present.

The result of this method, in our government's opinion, is an "austerity trap." When fiscal consolidation turns on a predetermined debt ratio to be achieved at a predetermined point in the future, the primary surpluses needed to hit those targets are such that the effect on the private sector undermines the assumed growth rates and thus derails the planned fiscal path. Indeed, this is precisely why previous fiscal-consolidation plans for Greece missed their targets so spectacularly.

Our government's position is that backward induction should be ditched. Instead, we should map out a forward-looking plan based on reasonable assumptions about the primary surpluses consistent with the rates of output growth, net investment, and export expansion that can stabilize Greece's economy and debt ratio. If this means that the debt-to-GDP ratio will be higher than 120% in 2020, we devise smart ways to rationalize, re-profile, or restructure the debt – keeping in mind the aim of maximizing the effective present value that will be returned to Greece's creditors.

Besides convincing the troika that our debt sustainability analysis should avoid the austerity trap, we must overcome the second hurdle: the "reform trap." The previous reform program, which our partners are so adamant should not be "rolled back" by our government, was founded on internal devaluation, wage and pension cuts, loss of labor protections, and price-maximizing privatization of public assets.

Our partners believe that, given time, this agenda will work. If wages fall further, employment will rise. The way to cure an ailing pension system is to cut pensions. And privatizations should aim at higher sale prices to pay off debt that many (privately) agree is unsustainable.

By contrast, our government believes that this program has failed, leaving the population weary of reform. The best evidence of this failure is that, despite a huge drop in wages and costs, export growth has been flat (the elimination of the current-account deficit being due exclusively to the collapse of imports).

Additional wage cuts will not help export-oriented companies, which are mired in a credit crunch. And further cuts in pensions will not address the true causes of the pension system's troubles (low employment and vast undeclared labor). Such measures will merely cause further damage to Greece's already-stressed social fabric, rendering it incapable of providing the support that our reform agenda desperately needs.

The current disagreements with our partners are not unbridgeable. Our government is eager to rationalize the pension system (for example, by limiting early retirement), proceed with partial privatization of public assets, address the non-performing loans that are clogging the economy's credit circuits, create a fully independent tax commission, and boost entrepreneurship. The differences that remain concern how we understand the relationships between the various reforms and the macro environment.

None of this means that common ground cannot be achieved immediately. The Greek government wants a fiscal-consolidation path that makes sense, and we want reforms that all sides believe are important. Our task is to convince our partners that our undertakings are strategic, rather than tactical, and that our logic is sound. Their task is to let go of an approach that has failed.

Read more at http://www.project-syndicate.org/commentary/greece-debt-deal-by-yanis-varoufakis-2015-04#LOF31yADLfTbaJzt.99

[The Brain]

Syndicate was awesome.

[The Minsky Moment]

Unit labor costs incorporate productivity.  They are the labor costs to produce a unit of output.  Theoretically, German unit labor costs should trend towards parity with ROW.

Quite so.  My bad.

Anyways, looking at the OECD numbers, with 2005 indexed at 100,  Germany is at 100 for 1995, 101 for 2000, 104 for 2010 and 111 today.  Basically 11% increase over 20 years.

By comparison Italy is 81, 86, 114, 122.  50% increase over 20 years.
France is 94 to 115 over the same period - 22% increase
UK - 80 to 120.  50% increase.

Just focusing on the increase since 2005, the German increase is one of the lowest in Europe; other than the Czechs, Ireland, Spain and Portugal. (i.e. the restructuring economies).  BTW the Greeks are not far behind,.

In fairness to Germany it could be argued that their ULC were improperly elevated by unification; the data seem to support this because there is a big increase in German ULC in 1991-1993.   The need to squeeze that out IIRC was cited as justification for the Schroeder reforms.  But 25 years out it shouldn't be such a significant influence anymore.

[Admiral Yi]

I'm not sure Germany's international competitiveness is best determined by comparison to the rest of Europe.

[Zanza]

http://www.nytimes.com/2015/04/24/opinion/nikos-konstandaras-greeces-eerie-calm.html

Greece's Eerie Calm
APRIL 23, 2015
Nikos Konstandaras

As Greece teeters on the edge of default and possible exit from the European common currency, foreign officials cannot understand how Greek government officials can appear so sanguine.

An explanation of the government's motives and behavior can be found in spheres beyond the economy, where the government has moved swiftly to impose its agenda on domestic and foreign policy — to the alarm of allies, opposition parties and investors.

Nowhere has the government shown an appetite to compromise. This mentality is rooted in a century of conflict between left and right, when foreign powers helped right-wing governments maintain power at the expense of leftist forces. Now, with a radical leftist party, Syriza, in power for the first time, working through this situation could be as self-destructive as it is inevitable.

Since its election on Jan. 25, Syriza has adopted programs aimed at easing some of the effects of austerity, while promising to crack down on tax evasion, particularly by the rich.

It has taken a more tolerant policy toward migrants and refugees, tested relations with foreign partners, and frozen or rolled back a number of reforms, not only in the economy.

In education, a new law would give students and political parties greater influence in the running of universities, restoring a model adopted in the early 1980s that seriously undermined universities (and was changed only in 2011).

The police have been instructed to tolerate self-described "anti-establishment" activists, to the point that protesters painted insults against the police on riot squad buses.

On judicial issues, prosecutors claim that a new law aimed at easing prison congestion and setting free ailing prisoners will release too many convicts unconditionally; the United States and families of the victims of the November 17 terrorist group condemn an impending decision that would allow Savvas Xiros, who is serving five life terms (for, among other crimes, the murder of a United States defense attaché in 1988 and a United States Air Force sergeant in 1991), to finish his sentence at home because of injuries sustained in 2002 when a bomb he had intended to plant at a shipping company's office exploded in his hands.

In foreign policy, Prime Minister Alexis Tsipras raised eyebrows in Washington and Brussels when he visited President Vladimir V. Putin in Moscow earlier this month, after his government had made clear its opposition to sanctions against Russia for its incursion into Ukraine. Last week, his defense minister was also in Russia, renewing calls for an end to sanctions. (Apart from words, however, Athens has not broken ranks with its partners.)

And even as the government says it wants investments and growth, several ministers and Syriza deputies oppose a Canadian company's gold-mining operation in northern Greece, while government members have given out conflicting signals about the potential expansion of a Chinese company's container terminal in Piraeus.

Mr. Tsipras's first act as prime minister was to visit a site where German occupying forces carried out a mass execution during World War II. Since then, Parliament has debated Greek claims for reparations for German atrocities and damages, and for the repayment of a loan the Nazis forced the Greek central bank to provide during the occupation.

A government official said that the total claim came to 278.7 billion euros. Germany, which directly or indirectly guarantees some €65 billion of the €240 billion bailout, says this was dealt with in past agreements.

But the Greek Parliament has set up a committee to investigate — and press — the issue.

Another inquiry is looking into how Greece amassed a debt that reached €317 billion at the end of 2014; the committee is expected to recommend that part of the debt not be paid. A third committee is investigating the circumstances of the bailout deal signed in 2010.

The reparation and debt inquiries are headed by Zoe Konstantopoulou, the Parliament's speaker, a high-profile opponent of the bailout agreement. They appear designed to play on the government's message that Greece is the victim of foreign loan sharks and of a corrupt local elite, rather than a country that needs to reform its economy and public administration.

Suspicion of foreign powers is the glue that holds the coalition's two disparate parties together. Independent Greeks, the junior partner, is a hard-line right-wing nationalist group born out of opposition to the bailout; Syriza is the offspring of part of the Communist-led resistance against the Germans in World War II. In the civil war that followed Germany's defeat, first Britain and then the United States backed a right-wing government, and during most of the Cold War leftists were marginalized in Greece.

Challenging Greece's allies and highlighting claims against Germany give Syriza street credibility, and allow it to appear more "patriotic" than previous governments, which had raised but not forced the issue of reparations.

In negotiations with creditors, the government refuses to reform pensions and labor law, increase value-added taxes and encourage privatization. Yet it expresses confidence that Greece's European Union partners, the European Central Bank and the International Monetary Fund will back down.

"I remain firmly optimistic that there will be an agreement by the end of the month," Mr. Tsipras told Reuters on April 16. Europe would not "choose the path of unethical and brutal financial blackmail," he said, but would opt for "the path of bridging differences."

To avoid rifts in his party, save face over unrealistic promises he made to voters and underline that he will not be "blackmailed," Mr. Tsipras prefers to risk a breakup with creditors, which could destroy the economy.

Relishing their rise to power, he and his party display intransigence while demanding compromise. They either have unshakable confidence that they will get their way, or blind faith that, as time runs out, others will care more about the Greek people than they appear to and will step in to avert disaster.

Nikos Konstandaras is the managing editor and a columnist at the newspaper Kathimerini.

http://www.theguardian.com/commentisfree/2015/apr/23/germany-grexit-eu-greece-leaving-europe

Germany is becoming relaxed about a Grexit – perhaps too relaxed
Charles Grant
Many EU member states and the US still fear the consequences of Greece leaving Europe. They need to get their voices heard in Berlin

In Berlin, views on Greece's possible exit from the eurozone are shifting. "We have never been closer to a Grexit, and we are close," said a senior official. The last time a Greek departure looked likely, in 2012, Angela Merkel worried that it would provoke panic in financial markets and pulled back from the brink. This time, Germany's leaders think a Grexit would not destabilise the eurozone.

Merkel's officials say that she would be willing to compromise with Greece – if prime minister Alexis Tsipras, whose Syriza party was elected in January, came up with a serious reform programme. Germany wants his socialist government to commit to fighting corruption, improving tax collection, strengthening fiscal discipline, modernising labour markets and attacking vested interests. But three months after being elected, Tsipras seems unwilling or unable to do any of these things.

Germany is losing patience. Until Greece comes up with a viable plan, Merkel will block the release of existing bailout funds, and ensure there is no new money. Meanwhile, the Greek government is struggling to repay foreign debts and to pay salaries and pensions. A Greek default, which could easily lead to a Grexit, is looming.

One key point for Merkel, say officials, is that Germany should not be blamed. A recent visitor reports her as saying: "If Grexit happens, people will see the cause was that Greece failed to do its homework, not that we withheld solidarity." In this blame game, Merkel is – at least for now – succeeding. Many of those – including France and Italy, and to some degree the European Commission and the International Monetary Fund – who agree with Greece that Germany has imposed excessive austerity, have been alienated by Syriza's chaotic style of governing, its extreme rhetoric and its inept diplomacy. Countries such as Finland, the Netherlands, Slovakia and Estonia are pushing Germany to take a hard line. So are Spain and Portugal, proud to have carried out painful reforms.

Some German officials think Greece would be better off out. "As an economist, I am not sure Greece should stay in the euro," said one. It is structurally uncompetitive and could stagnate like southern Italy, he believes. Alhough Latvia, Lithuania, Spain and Ireland had understood the need for change, "sometimes the pressure to reform does not work", and he worries that keeping Greece in at all costs could undermine European cohesion.

Advocates of a Grexit believe that if Greece had an autonomous monetary policy and a weaker currency, the economy – which has shrunk by a quarter since the crisis began – could recover more rapidly than if it remained locked in an austerian eurozone. Yet leaving the euro would mean millions of contracts having to be rewritten; and foreign debt (in euros or dollars) would balloon when measured in new drachma, forcing companies and banks into default. Inflationary pressure and financial chaos would ensue. The deeper institutional and structural problems of the Greek state and economy would remain unresolved, constraining long-term growth prospects.

As for the impact on the rest of the eurozone, German officials are remarkably sanguine. German taxpayers are liable for around €70bn of Greece's €240bn of official debt, the loss of which, they say, would be manageable. Over the past five years, the EU has created the European stability mechanism, with €500bn for helping troubled banks or governments, while the European Central Bank has unveiled a bond-buying scheme for emergencies. So the officials not expect systemic threats to the eurozone.

"Spain, Portugal and Ireland would be alright because they have done their homework," said one German official. When pressed, he said that if a Grexit drove the financial markets to demand a premium before lending to another country, Germany would reassure them by proposing more integrated eurozone policy-making.

But such attitudes may be too nonchalant. A Grexit would demonstrate that the euro lacked the political foundations to ensure its permanence, and the markets' reaction is unknowable. The ESM lacks the resources to bail out, says, Italy. Those worried that a Grexit could trigger a partial unravelling of the eurozone include the IMF, the European Commission, the ECB, France, Italy and the Obama administration. The US also frets about the geopolitical context: what if a bust-up between Athens and its partners fuelled a Greek-Russian rapprochement?

These governments and institutions are urging Merkel to be patient with Athens, and to explore every option for compromise. If a Grexit triggered significant economic or political damage, they would put much of the blame on Germany. The US has long understood that in its role as the transatlantic alliance's hegemon, it must accept some costs for the greater good of the alliance's stability. It expects as much from the EU's hegemon.

But in Berlin, which plays a decisive role in eurozone crisis management, the key decision-makers believe Greek membership of the euro is becoming unsustainable. Germany does not always listen to voices in other capitals. Its friends should make every effort to help it to see the bigger picture.

Everybody seems awefully relaxed about the situation. I wonder if we are approaching disaster with a seeing eye here...

[PJL]

My guess that in the event of Grexit, Germany would be prepared to help bail out the others who followed their austerity programs in order to prevent further contagion. It would probably be more expensive than bailing out Greece, but politically more palatable. Certainly a continuing feature of the Euro-crisis so far.

[Sheilbh]

Everybody seems awefully relaxed about the situation. I wonder if we are approaching disaster with a seeing eye here...

That Charles Grant and Christian Odendahl piece was edited from the Centre for European Reform with a wonderful title:
http://www.cer.org.uk/insights/vorsprung-durch-grexit

I think everyone is a little relaxed. As I see it the only way Grexit is safe is if there's never a Eurozone crisis or an economic crisis in a Euro country again - probably through full fiscal union.

My view, I think, is roughly what Draghi said. The ECB now has the tools to probably calm the markets and stop contagion. However while QE is active, OMT and 'whatever it takes' are still untested so it may be that what the ECB deemed necessary the markets may judge differently. But the Eurozone would also be entering uncharted waters, as he said. The ECB could fix the short-term problems (though I've read money managers are starting to hold back in Europe because they're worried about volatility in Europe - not just Greece) but that may not be enough in the long-run.

For me the biggest risk is political. At the minute the Euro is seen as a single currency in large part because it's seen as irreversible. I think that is a bit like virginity, you can only lose it once (and you should probably think carefully about it, make sure it's for someone special and don't throw it away on the first sleazy Greek who comes your way).

So to take that Charles Grant piece. Currently contracts are written across Europe without any provision for the break-up of the EU. After it happens once I imagine lawyers and companies across the Eurozone will want to make sure that their contracts stipulate exactly what happens in the case of another country leaving the Eurozone.

If, as everyone expects, outside of the Euro at some point the Greek economy starts to recover quite well (I'd guess within 12-18 months they'd have one hell of a rebound) then doesn't a Eurozone exit look more of a positive prospect to Iberian countries or Ireland, or France, or Italy.

And on Italy, the polls there show support for the Euro is roughly 50-50 and three of the opposition parties back a referendum on Euro membership (Italy is apparently the country that would benefit the most from leaving the Euro, however in theory it should also benefit the most from the fall in oil prices, the value of the Euro and QE so things should turn up there). Once exit's happened practically, rather than just a theory, and if it's benefiting the Greeks how much do the markets get sucked back into judging the Euro on polls and politicians' statements rather than economics? Is that a viable currency?

And in that situation isn't the shoe on the other foot? Don't the dynamics change to trying to convince countries that may consider leaving to stay?

I'm not convinced that the long-term consequence of Grexit wouldn't be that the Eurozone became little more than ERM III, and I wonder how long it would before the markets did actually manage to force a country out (my money's on Portugal).

I think the immediate crisis from Grexit is probably quite easily containable. I am very unsure what the long-term implications are and I think anyone who says they're confident one way or the other is either an idiot or lying.

For what it's worth I expect/hope that as in 2012 Merkel will pull everyone back from the brink.

Edit: Incidentally it's worth saying that when I say everyone is very relaxed I'm not including the City. I've read a few papers by the banks and they're struggling with such a default situation: European muddle or default and probable Grexit. Most still bet on the former but do highlight the profound uncertainty of the latter.

I think you're probably right Zanza that we'll eventually - by July? - move to a situation where Greece can default within the Eurozone. I don't think the Greeks can go any further without further social collapse and for some baffling reason it may be that other politicians get more reward from voters by not conceding and losing billions of Euros than conceding and actually getting some credit back.

State insolvencies really are very different from the private sector

[The Minsky Moment]

I'm not sure Germany's international competitiveness is best determined by comparison to the rest of Europe.

Who else would you compare to?
BTW the US rate of increase is much higher as well

[Admiral Yi]

Who else would you compare to?
BTW the US rate of increase is much higher as well

Why, everyone of course.

[The Minsky Moment]

Why, everyone of course.

So like Burkina Faso, Myanmar and Peru, say?   

[Admiral Yi]

So like Burkina Faso, Myanmar and Peru, say?   

Why not?  If Burkina Fasoenes start producing high quality luxury automobiles at a half the price Germans do, they're fucked.