Greek Referendum Poll

[Zanza]

Why is this between Germany and Greece anyway?

Because Germany's unchecked foreign trade surplus (something that should have been addressed at the time of Euro creation) is one of the reasons for eurozone problems. It is what exacerbates effects of the crisis across the PIGS and Ireland.

Did you ever check Ireland's current account? Almost as high as Germany's by the way. And neither has anything to do with Greece's short-term issues. And why not single out the Netherlands, which has an even higher current account surplus than Germany?

[Zanza]

A country running a constant substantial trade surplus with another country is essentially generating huge amounts of cash (that it is siphoning from the weaker country) that it cannot sensibly spend on consumption or sustainable investment. The cash thus ends up being lent at increasingly speculative prices back to the weaker country, to maintain the trade surplus, thus creating a vicious cycle of sorts.

Normally, a weaker country can protect itself from that kind of predatory mercantilism by rising its tariffs (to decrease imports) or becoming more competitive, usually through price (to increase exports), usually by devaluing its own currency (this is what Poland has been doing for the last two decades) - but both of these tools are unavailable to a Eurozone member state protecting itself from another Eurozone member state's predation.

In essence, the mechanism is similar to the recent real estate bubble only that it is one country creating a bubble in another country. Once the bubble bursts, the weaker country is left with a huge debt and rapidly contracting economy. Sounds familiar?

That's a good description of what happened in Spain or Ireland. Not so much for what happened in Greece. There was no major asset bubble there. It was mostly consumption.

[Syt]

I think we may have found a new topic Mart thinks he's competent in but knows little about other than law

[Martinus]

A country running a constant substantial trade surplus with another country is essentially generating huge amounts of cash (that it is siphoning from the weaker country) that it cannot sensibly spend on consumption or sustainable investment. The cash thus ends up being lent at increasingly speculative prices back to the weaker country, to maintain the trade surplus, thus creating a vicious cycle of sorts.

Normally, a weaker country can protect itself from that kind of predatory mercantilism by rising its tariffs (to decrease imports) or becoming more competitive, usually through price (to increase exports), usually by devaluing its own currency (this is what Poland has been doing for the last two decades) - but both of these tools are unavailable to a Eurozone member state protecting itself from another Eurozone member state's predation.

In essence, the mechanism is similar to the recent real estate bubble only that it is one country creating a bubble in another country. Once the bubble bursts, the weaker country is left with a huge debt and rapidly contracting economy. Sounds familiar?

That's a good description of what happened in Spain or Ireland. Not so much for what happened in Greece. There was no major asset bubble there. It was mostly consumption.

Edit: Sorry, now I can see my post was misleading. I didn't mean to say Germany created a real estate bubble in Greece. I meant the effect was similar to a real estate bubble, only that it all went into consumption. Essentially, Germans were lending to Greeks inordinate amounts of cash to buy more German products.

[Martinus]

Incidentally, the method of competing Poland has been using (devaluing our currency in order to remain price-competitive) can also be a trap - it ends up creating a substantial pay disparity, which in turn causes people to migrate for job to the richer countries, thus turning the country from which they emigrate even more shitty.

It looks like the EU and the Eurozone were created by Germans to do what Otto III and Hitler did not manage - subjugate Europe to Germany.

[Admiral Yi]

I thought it was a reasonable explanation.  By Marty standards it deserves the Riksbank Prize.

The problem I have with it though, is that even with liquidity sloshing around and rates low,  no one is forced to over-leverage.  I have not taken advantage of the currently low rates to buy a six bedroom McMansion.  Greece was not obligated to put 19% of GDP on the credit card.

[Martinus]

I thought it was a reasonable explanation.  By Marty standards it deserves the Riksbank Prize.

The problem I have with it though, is that even with liquidity sloshing around and rates low,  no one is forced to over-leverage.  I have not taken advantage of the currently low rates to buy a six bedroom McMansion.  Greece was not obligated to put 19% of GDP on the credit card.

I haven't checked it but I assume this started as individual private debt (both taken by households and businesses) to fuel the consumption of imported products - this is something that the state cannot really affect with policy if it can neither set tariffs, print more money or set the interest rates. Once this debt got big enough, the state had to step in with its own money to ease the pain (or face a revolt) - so it started to borrow itself. 

Oh, and let's not forget that in a normal country, there is also inflation to ease some of the debt pain - but not in Eurozone, thanks to the German masters who consider inflation to be the Great Satan.

[Admiral Yi]

I haven't checked it but I assume this started as individual private debt (both taken by households and businesses) to fuel the consumption of imported products - this is something that the state cannot really affect with policy if it can neither set tariffs, print more money or set the interest rates. Once this debt got big enough, the state had to step in with its own money to ease the pain (or face a revolt) - so it started to borrow itself. 

Oh, and let's not forget that in a normal country, there is also inflation to ease some of the debt pain - but not in Eurozone, thanks to the German masters who consider inflation to be the Great Satan.

The Greek government saw its population taking on too much debt, so they responded by taking on too much debt?

You've lost me again.  Why the hell would they do that?

[Richard Hakluyt]

This article has a nice chart that shows Greek debt as a percentage of GDP since 1977 :

http://dbfchicago.com/greek-exit-eurozone-mean/

I visited Greece in 1976 and can confirm that the infrastructure and general development level was very low compared to Western Europe. If we look at the graph we see debt rising from 20% to 100% in the period 1977-1990, subtantial modernisation took place during that period. The debt then remains fairly constant at 100% till the smash of 2008 where it moves rapidly upwards till 2012.

Interesting data. I suppose Greece should have reduced its debt ratio in the period 1992-2007, but the data is consistent with them being victims of the 2008 meltdown rather than being chronic wastrels 

[Martinus]

I haven't checked it but I assume this started as individual private debt (both taken by households and businesses) to fuel the consumption of imported products - this is something that the state cannot really affect with policy if it can neither set tariffs, print more money or set the interest rates. Once this debt got big enough, the state had to step in with its own money to ease the pain (or face a revolt) - so it started to borrow itself. 

Oh, and let's not forget that in a normal country, there is also inflation to ease some of the debt pain - but not in Eurozone, thanks to the German masters who consider inflation to be the Great Satan.

The Greek government saw its population taking on too much debt, so they responded by taking on too much debt?

You've lost me again.  Why the hell would they do that?

When the population is taking too much debt, people and companies are eventually starting to go bust, so people are thrown out of their homes, they have their assets seized, lose their jobs in failed companies etc. Surely, you see how stuff like that creates a need for a country to step in with its own money, right?

And that does not even address the fact that when it comes to people employed by the state, there is a growing pressure on the state as the employer to increase their pay, so they may afford more stuff.

[The Brain]

I haven't checked it but I assume this started as individual private debt (both taken by households and businesses) to fuel the consumption of imported products - this is something that the state cannot really affect with policy if it can neither set tariffs, print more money or set the interest rates. Once this debt got big enough, the state had to step in with its own money to ease the pain (or face a revolt) - so it started to borrow itself. 

Oh, and let's not forget that in a normal country, there is also inflation to ease some of the debt pain - but not in Eurozone, thanks to the German masters who consider inflation to be the Great Satan.

The Greek government saw its population taking on too much debt, so they responded by taking on too much debt?

You've lost me again.  Why the hell would they do that?

When the population is taking too much debt, people and companies are eventually starting to go bust, so people are thrown out of their homes, they have their assets seized, lose their jobs in failed companies etc. Surely, you see how stuff like that creates a need for a country to step in with its own money, right?

And that does not even address the fact that when it comes to people employed by the state, there is a growing pressure on the state as the employer to increase their pay, so they may afford more stuff.

[Martinus]

This article has a nice chart that shows Greek debt as a percentage of GDP since 1977 :

http://dbfchicago.com/greek-exit-eurozone-mean/

I visited Greece in 1976 and can confirm that the infrastructure and general development level was very low compared to Western Europe. If we look at the graph we see debt rising from 20% to 100% in the period 1977-1990, subtantial modernisation took place during that period. The debt then remains fairly constant at 100% till the smash of 2008 where it moves rapidly upwards till 2012.

Interesting data. I suppose Greece should have reduced its debt ratio in the period 1992-2007, but the data is consistent with them being victims of the 2008 meltdown rather than being chronic wastrels 

I would be interested to see how much of that debt was domestic or bonds which, if Greece had its own currency, would be denominated in that currency. If that percentage was substantial (and I assume that initially, i.e. prior to the IMF's and the ECB's bail out of private creditors, it was) then once again it shows how Greece got into a trap by being unable to use inflation and devaluation to dig itself out of that hole.

[celedhring]

Maintaining 100% GNP debt is a bit crazy during boom times - once bad shit happens and tax revenues crater because of a recession, you are fucked. We were at 30% during that time and we still ended up in the gutter.

Troika still made things worse, mind.

[Martinus]

Maintaining 100% GNP debt is a bit crazy during boom times - once bad shit happens and tax revenues crater because of a recession, you are fucked. We were at 30% during that time and we still ended up in the gutter.

Troika still made things worse, mind.

Yes, but a lot of countries who did not go bust had 100% GNP debt or more, so while it may be imprudent in retrospect, you can't really say that they are themselves to blame if something bad happens - it's more bad luck.

[celedhring]

Something bad always happens though. There was a bit of an illusion of a permanent boom in the 90s and 2000s, mind (same in Spain), which I think may have played a part.



Almost 30 years of continuous growth. I can see why they thought they were immune.

It's really hard to make counter-cyclical policy during a recession, and meet all the safety need repayments, when your budget is taken over by debt repayment.