Sovereign debt bubble thread

[Tamas]

So I read that the Italians announced austerity which at first glance sound promising.

Now Rome will burn but if they manage to keep control, it may benefit Europe. 

Is there any country whose outlook has improved after undertaking austerity measures?

if:

a) the state is spending more than it's income
and
b) the state can only get loans on interest rates which are far, far, far above the projected growth in the country,

then yes, austerity is the way to go.

In general, deficit spending should be the thing of the past for the everyday operation of a country. To rely on loans for welfare spending and pensions and whatnot, it is suicidal, as we can so easily see it nowadays.

[Zanza]

We should combine austerity with some kind of investment program, if necessary financed by printing money. Deflation alone won't solve this crisis. That said, I think that austerity is necessary to regain confidence in the midterm.

[Sheilbh]

Argentina

They didn't though.  They kicked the IMF out, defaulted and negotiated a settlement with their creditors over the next 10 years - when those creditors decided they'd rather receive something than nothing.  It's like Iceland.

Now the Argentine finance minister's flying around telling Americans and Europeans to reject austerity and reject the IMF.

Is there any country whose outlook has improved after undertaking austerity measures?

Ireland's looking good after three years.  If you go back through recent examples then the UK, Canada and Sweden after their 1990s austerity packages.  I think that in the years that followed all countries had above average growth - Sweden and Canada even managed to avoid the worst of this recession.

Italy's a country that I actually think could pull this off.  They're running a primary surplus and over the past decade only Somalia and Haiti have grown less.  The Italians have a pretty diverse economy from my understanding.  All told, if the rest of the world doesn't plummit - so if the Franco-German differences are hammered out so we've a credible deal, and the ECB acts -  Italy's could do reasonably well with some degree of liberalisation especially in the service sector.  Italy is, I believe, the country who basically stopped once they got into the Euro (roughly the time Berlusconi came to power).  Since then they've just stalled at best.

We should combine austerity with some kind of investment program, if necessary financed by printing money. Deflation alone won't solve this crisis. That said, I think that austerity is necessary to regain confidence in the midterm.

I agree.  But the austerity plan needs to have a route to growth.  Endless rounds of spending cuts and deflation won't do.  There needs to be a sunny uplands for the people of these countries.  I see austerity more as necessary for short-term credibility necessary to implement economic reforms that will help in the medium term.

Different things are needed for different countries.  The Greeks clearly needs far more than austerity.  Ireland on the other hand needs help paying down her debt - not least because the rest of Europe benefited from the Irish guaranteeing their banks - but fundamentally they should be able to grow strongly again.  There's no need for massive structural reforms.

In general, deficit spending should be the thing of the past for the everyday operation of a country. To rely on loans for welfare spending and pensions and whatnot, it is suicidal, as we can so easily see it nowadays.

But of the PIIGS countries I believe three of them had seen national debt as a % of GDP decline over the past decade.  Spain and Ireland especially were held up as models of thrifty states paying down their national debt with healthy surpluses.  I think the biggest problem of the talk of austerity and the acronym is that it's confused the nature of the problems each of these countries faced.  They were just all the profligate periphery and they've all, it seems to me, been defined by Greece, the worst and most peculiar of them.

Similarly if you look at these countries they've not got the best pension or welfare schemes in Europe - so let's not damn them - the Northern European core which has the most successful and well-integrated welfare state's done pretty well.  But the truth is we look at those Northern European countries and praise them now, five years ago I remember reading how much they need to reform, how their systems were ossifying and that they really need to follow countries like Ireland and Spain.

[The Larch]

Is there any country whose outlook has improved after undertaking austerity measures?

Ireland's looking good after three years.  If you go back through recent examples then the UK, Canada and Sweden after their 1990s austerity packages.  I think that in the years that followed all countries had above average growth - Sweden and Canada even managed to avoid the worst of this recession.

Italy's a country that I actually think could pull this off.  They're running a primary surplus and over the past decade only Somalia and Haiti have grown less.  The Italians have a pretty diverse economy from my understanding.  All told, if the rest of the world doesn't plummit - so if the Franco-German differences are hammered out so we've a credible deal, and the ECB acts -  Italy's could do reasonably well with some degree of liberalisation especially in the service sector.  Italy is, I believe, the country who basically stopped once they got into the Euro (roughly the time Berlusconi came to power).  Since then they've just stalled at best.

Also the Baltic countries, apparently, which were very badly hit a couple of years ago. I think that it was Latvia that pulled them off quite well on the macro level, although the population and particulary the middle class has suffered and is still suffering a bloody lot because of them.

In general, deficit spending should be the thing of the past for the everyday operation of a country. To rely on loans for welfare spending and pensions and whatnot, it is suicidal, as we can so easily see it nowadays.

But of the PIIGS countries I believe three of them had seen national debt as a % of GDP decline over the past decade.  Spain and Ireland especially were held up as models of thrifty states paying down their national debt with healthy surpluses.  I think the biggest problem of the talk of austerity and the acronym is that it's confused the nature of the problems each of these countries faced.  They were just all the profligate periphery and they've all, it seems to me, been defined by Greece, the worst and most peculiar of them.

Similarly if you look at these countries they've not got the best pension or welfare schemes in Europe - so let's not damn them - the Northern European core which has the most successful and well-integrated welfare state's done pretty well.  But the truth is we look at those Northern European countries and praise them now, five years ago I remember reading how much they need to reform, how their systems were ossifying and that they really need to follow countries like Ireland and Spain.

What? Prejudiced people are associating a group of countries and diagnosing them the same way while being ignorant about their details, situation and particulars? Say it aint' so!

[Iormlund]

if:

a) the state is spending more than it's income
and
b) the state can only get loans on interest rates which are far, far, far above the projected growth in the country,

then yes, austerity is the way to go.

I'm not saying Italy has an alternative. I'm just disputing the notion that killing things like R&D, education or infrastructure investment is somehow going to improve things.

[Admiral Yi]

I'm not saying Italy has an alternative. I'm just disputing the notion that killing things like R&D and infrastructure investment is somehow going to improve things.

Nobody disputes that austerity causes pain and I sure hope nobody thinks that balancing a budget automatically generates high, sustained growth.

[dps]

It shouldn't take a rocket scientist (or a trained economist) to figure out that deficit spending can't be sustained forever.

[Crazy_Ivan80]

It shouldn't take a rocket scientist (or a trained economist) to figure out that deficit spending can't be sustained forever.

You'd be surprised.

[The Minsky Moment]

Of course deficit spending can be sustained forever; sustainability is a function of the scale of such spending to GDP and long run growth rates.  Pretty much any developed country can easily sustain annual deficit spending averagin about 2% per year indefinitely.

[Richard Hakluyt]

Yes, with 2% inflation and 4% nominal growth, nice figures for a mature economy, a country could borrow 2% of GDP and maintain a debt of 50% of GDP 

[DGuller]

It shouldn't take a rocket scientist (or a trained economist) to figure out that deficit spending can't be sustained forever.

It definitely doesn't take a trained economist to figure this stuff out.  In fact, not being a trained economist is a necessary condition to come to this conclusion.

[Zanza]

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013600/germany-is-the-ultimate-victim-of-emu/

Germany is the ultimate victim of EMU

Enough is enough. Please stop defaming Germany out there in the blogosphere.

The Germans are not engaged in a mercantilist conspiracy to subjugate and milk southern Europe. They are not conducting "warfare by other means", or heaven forbid, trying to establish a Fourth Reich.

The German people entered monetary union for honourable motives, believing they were acting as good Europeans. It is excruciating for them to see those Athens banners in Syntagma Square showing Chancellor Angela Merkel wearing the Swastika, or read that sign "Arbeit Macht Frei".

They gave up the D-Mark reluctantly under French and Italian pressure, as the price for acquiescence in Reunification.

They entered EMU at an overvalued rate after the Reunification bubble, leaving them in semi-slump for half a decade. They slowly clawed back competitiveness the hard way, by squeezing wages and driving up productivity.

It is entirely understandable that they now think Club Med can and should do the same. (They are profoundly wrong, of course, because Germany was able to lower relative wages during a) a global boom, b) against other EMU states that were inflating c) and with benchmark borrowing cost that stayed low even during the dog days. None of these factors apply to Italy or Spain now. But this is hard to explain this to the man or woman on the Berlin tram.)

If EMU now puts Germany in mercantilist ascendancy – an untenable position politically – it is by accident. They make good products (and for that reason they should have a strong currency that rises to reflect the fact). The euro is the cause of all the trouble, not German ambitions or motives. Germany is now hated in Europe more than at any time since World War Two because it allowed itself to roped into this ruinous currency experiment, and for no other reason whatsoever.

Chancellor Merkel gave an emotional defence of German conduct today in the Bundestag. Her country is not trying to dominate anybody, she said. "Politics has destroyed all trust," she said.

"German and European unity have been and are two sides of the same coin. We will never forget that."

She is entirely right in one sense to continue ruling out Eurobonds as "unthinkable" under current structures, and a violation of German constitution, but that is not really an answer to the historical challenge that she faces in late 2011.

Germany cannot unwind the clock. It did take the fateful step of joining monetary union, and from that awful error follows a string of strategic imperatives.

As the wise professors warned at the time, EMU would lead ineluctably to full fiscal union because an orphan currency would not endure without an EU Treasury and government to back it up, but it would a fiscal union accountable to nobody, because no European democracy exists, or can exist.

It would lead to debt pooling and shared budgets.

It would lead – fatally – to loss of the Bundestag's sovereign powers to tax and spend. The core functions of parliament would slip away to EU mandarins.

It would lead to the emasculation of Germany's exemplary post-War democracy.

It would lead in essence to the abolition of Germany as a nation state, even if the window flowers remained in place.

All else was illusion and wishful thinking.

That is what monetary union always meant and means now, though the trick being played on Europe's citizens was fudged by dishonest treaties, themselves dishonestly ratified.

It is why so many of us on this side of the Ärmelkanal have fought tooth and nail for twenty years to stop Britain being subsumed into this plaything of unaccountable elites, this Project so profoundly threatening to our self-government and constitutional order.

But this is where Germany now is. It must either immolate itself and dismantle the Bismarckian state for the cause of EMU, or prepare to finance an orderly withdrawal from monetary union (with the Finns, Dutch, and Austrians) so that the South can breathe again and hope to recover.

That is the choice. All else is can-kicking, denial, obfuscation, muddle, and self-delusion. As is now becoming obvious, the failure to resolve the matter one way or the other is becoming a danger to the global financial system. It threatens to uncork a global depression. Germany must at last decide.

It is a horrible choice. My sympathies go to the German people who were never given a vote on this ensnarement and infeudation of their peaceful country, and who were egregiously deceived by their own leaders, and who cannot now begin to understand why they suddenly are target of such furious and venomous global criticism.

The Germans too are victims of this ruinous project, the greatest victims of all. Their elites have led them into a diplomatic and economic Stalingrad.

You guys should all feel sorry for us. 

[The Brain]

WW3 is coming. And since WW1 was "The Great War" and WW2 was "The Good War" it will likely be "The Meh War".

[MadImmortalMan]

Yes, with 2% inflation and 4% nominal growth, nice figures for a mature economy, a country could borrow 2% of GDP and maintain a debt of 50% of GDP 

...That is constantly increasing. Now all you have to do is wait until GDP is no longer growing faster than the borrowing and you've got a problem. I think it's disingenuous to assert that a nation can maintain deficit spending indefinitely, just because it can theoretically work under the right conditions. In the real world those conditions are not possible. Therefore, the assertion is a lie. At some point, running a surplus has to be necessary, if for no other reason than to create leverage room to borrow for stimulus when it becomes required.

[Richard Hakluyt]

Yes, with 2% inflation and 4% nominal growth, nice figures for a mature economy, a country could borrow 2% of GDP and maintain a debt of 50% of GDP 

...That is constantly increasing. Now all you have to do is wait until GDP is no longer growing faster than the borrowing and you've got a problem. I think it's disingenuous to assert that a nation can maintain deficit spending indefinitely, just because it can theoretically work under the right conditions. In the real world those conditions are not possible. Therefore, the assertion is a lie. At some point, running a surplus has to be necessary, if for no other reason than to create leverage room to borrow for stimulus when it becomes required.

The point is that governments took this advantage for granted and then systematically borrowed even more, thus getting into trouble. If you broadly aim for a balanced budget then there is a lot of fiscal firepower available when times get rough, and the debt incurred during those rough times should not prove to be too problematic. I know that Britain was borrowing throughout the last boom, there should have been several years of surplus.