Sovereign debt bubble thread

[Iormlund]

Sadly, I think default and exit is the only answer - and not just for Greece - as long as long term implications of the € are not addressed. And nobody seems to care about that part.

Zanza's link to that €-benefit study has me convinced that the whole Eurozone project was a truly terrible idea. In return for minuscule growth we lost a huge amount of purchasing power during the last decade, got ourselves in deep debt and to top it off killed our exporting industries since the high € made them uncompetitive. And those won't be back. Even if our salaries were cut by half, who in his right mind would invest hundreds of millions here in the face of truly horrendous consumption? It makes much more sense to do it in Slovakia, Vietnam, Brazil or Mexico, where you have access to growing markets and even lower costs.

[Tamas]

But why is the "live on loan, inflate to hell when can't pay it back" circle such a better alternative?

[Iormlund]

I'm not saying default and exit is great. I'm saying long term is better than staying at the Euro, because long term trade imbalances are not being realistically addressed in any way whatsoever.

Germany's solution for that is to lower salaries to a point where we export shit to the core. And that's never going to work for the reasons I already pointed out. With an imploding domestic market nobody is going to opt for Spain or Greece to site their new manufacturing plant. It makes much more sense to do so closer to the consumer or where salaries are even lower. Especially since the € is unlikely to remain this low long term if it survives, thus increasing future costs significantly.

Structural reforms are a good idea and I've been pointing that out from the very start, but they won't work on their own. In fact in this climate they will only end in more unemployment as less productive or expensive workers are laid off but not replaced. There needs to be growth for inefficient businesses and workers to be replaced by others. Hiring and firing can be as cheap as you want, but there has to be a market for those businesses, and credit for entrepreneurs to create jobs.

Internal devaluation does not lead to 'Hey salaries are so low I should create a business in my country'. It leads to 'Why am I going to buy a new car/house/service, when not only I don't how much I'll get paid in a year or in which currency, but if I will be paid at all? And how the fuck do I get my savings from being force-converted into New Pesetas?'

[Zanza]

Sadly, I think default and exit is the only answer - and not just for Greece - as long as long term implications of the € are not addressed. And nobody seems to care about that part.

Maybe they are just too busy to take care of the short-term dangers? By now, everybody should have understood the longer-term implications.

Zanza's link to that €-benefit study has me convinced that the whole Eurozone project was a truly terrible idea.

Rereading the German article that came with it I have to say that I made a mistake in the description. Apparently the graph only shows the gains each country made in 2010, not in the entire timeframe from 1999-2010. So for all we know, some countries might have benefitted a lot more than displayed here in the years 1999-2009.

In return for minuscule growth we lost a huge amount of purchasing power during the last decade, got ourselves in deep debt and to top it off killed our exporting industries since the high € made them uncompetitive. And those won't be back. Even if our salaries were cut by half, who in his right mind would invest hundreds of millions here in the face of truly horrendous consumption? It makes much more sense to do it in Slovakia, Vietnam, Brazil or Mexico, where you have access to growing markets and even lower costs.

Spain is considered to be significantly more competitive than Slovakia, Vietnam, Brazil or Mexico according the Global Competitiveness Report by the World Economic Forum. Wage costs are hardly the only factor that matters for investment. The most problematic factors for doing business in Spain are apparently access to financing, restrictive labor regulations and inefficient government bureaucracy. At least the second two are things that Spain can and should address. Financing is probably a direct effect of the crisis, but once everything has calmed down, it should no longer be a big problem. And arguably it should be easier to get financing inside than outside the Euro.

[Zanza]

As far as lost purchasing power goes, I don't have absolute figures. But according to Eurostat, Spain started at about 96% of the EU27 average per capita purchasing power, went all the way up to 105% by 2007 and since fell back to 100% in 2010. Germany for example went from 121% of the EU27 average to 118% in the same timeframe. So while Germans are still richer than Spaniards on average, the difference between them is much less pronounced than it was in 1999. Greece went from 83% to 93% from 1999-2010, while Italy went from 118% to 101%, which looks very, very bad to me at least. Ireland still had considerably more purchasing power than Germany in 2010 by the way, so they are suffereing on a fairly high level...

[Iormlund]

Maybe they are just too busy to take care of the short-term dangers? By now, everybody should have understood the longer-term implications.

More like everyone doing as little as they can to patch things up as they go along, until the ECB was forced to undertake a massive injection of money in the banking system last December to stave off an Italian or Spanish default. Every EU summit we are told about long term plans, yet the only two things proposed (and approved) have been deficit constitutional amendments - useless in the face of Spanish and Irish surpluses - and self-defeating austerity.

Granted, a few politicians like the Polish foreign minister and Monti have spoken out about long term problems, but nothing has really been done.

Rereading the German article that came with it I have to say that I made a mistake in the description. Apparently the graph only shows the gains each country made in 2010, not in the entire timeframe from 1999-2010. So for all we know, some countries might have benefitted a lot more than displayed here in the years 1999-2009.

Our trade balance deficit was even greater in previous years. And the Euro higher. If anything the results back then should be worse.

Spain is considered to be significantly more competitive than Slovakia, Vietnam, Brazil or Mexico according the Global Competitiveness Report by the World Economic Forum. Wage costs are hardly the only factor that matters for investment.

Yes, like R&D investment, which is getting the axe; access to talent, which is already leaving for greener pastures as well as facing cuts in education; a big, growing, healthy market, which by definition would be asphyxiated by internal devaluation ...
We do have very nice infrastructure and health care services, for as long as we can maintain them at least.

The most problematic factors for doing business in Spain are apparently access to financing, restrictive labor regulations and inefficient government bureaucracy. At least the second two are things that Spain can and should address. Financing is probably a direct effect of the crisis, but once everything has calmed down, it should no longer be a big problem. And arguably it should be easier to get financing inside than outside the Euro.

The reform I would want is not going to happen during this recession. The likely effect in this atmosphere of widespread losses would be a few million more unemployed in the blink of an eye. It can't happen unless there's room for job creation first. And it's not the cost of hiring that's hampering that now. That's practically free.
It's simply that everyone is enacting its own version of austerity. Banks are deleveraging like mad, government is cutting left and right and those still with a job are either saving in case things go south (like me) or providing for someone who lost his.

There was a discussion about public sector reform on Spanish EUOT this last week. A major overhaul of the entire concept of public service is badly needed, but I'd be very surprised if it  happened at all. Despite how popular it seems to be, it might result what Sir Humphrey would call a 'courageous' move. And it might not even be constitutional.

As far as lost purchasing power goes, I don't have absolute figures. But according to Eurostat, Spain started at about 96% of the EU27 average per capita purchasing power, went all the way up to 105% by 2007 and since fell back to 100% in 2010. Germany for example went from 121% of the EU27 average to 118% in the same timeframe. So while Germans are still richer than Spaniards on average, the difference between them is much less pronounced than it was in 1999. Greece went from 83% to 93% from 1999-2010, while Italy went from 118% to 101%, which looks very, very bad to me at least. Ireland still had considerably more purchasing power than Germany in 2010 by the way, so they are suffereing on a fairly high level...

You forget inflation. Real inflation, not just official figures which are tied to certain products and arbitrary weights. To put forward two examples, the weight of housing in our official inflation index in the middle of the bubble was a bit over 10%, when many young couples were dedicating a full salary to cover mortgage payments. In addition many flats were bought with only certain proportion of legit money, so official prices don't reflect their real cost.
Mind you this has not been at all uniform. It has hit especially hard people in their 20s or 30s, that purchased their homes in the last decade. This is also the group most vulnerable to the dual-tiered labour market, the first generation of Spaniards that hop from job to job.

[Zanza]

You forget inflation. Real inflation, not just official figures which are tied to certain products and arbitrary weights. To put forward two examples, the weight of housing in our official inflation index in the middle of the bubble was a bit over 10%, when many young couples were dedicating a full salary to cover mortgage payments. In addition many flats were bought with only certain proportion of legit money, so official prices don't reflect their real cost.
Mind you this has not been at all uniform. It has hit especially hard people in their 20s or 30s, that purchased their homes in the last decade. This is also the group most vulnerable to the dual-tiered labour market, the first generation of Spaniards that hop from job to job.

Well, I can't really argue with you based on perceptions and anecdotal evidence, I can only argue based on the official statistics and those suggest that inflation was lower than ever and that purchasing power relative to the rest of the union rose. That's not to say what you write is not correct, but I have no way to refute you or even to comment on it because I don't actually know the situation in Spain.

Spending half of your household income on mortgage payments seems to be a bad economic decision to me.

[Iormlund]

Spending half of your household income on mortgage payments seems to be a bad economic decision to me.

Which is why I don't have a mortgage. To the disbelief of everyone around me, who back then told me I was wasting money on rent. Guess who's laughing now. Or would be, if my taxes weren't up and my job in peril ...

[Neil]

Spending half of your household income on mortgage payments seems to be a bad economic decision to me.

It's the way of the future, especially for the working class.

[Tamas]

Doesnt many of these, at the end of the day, come down to two things:
-there really isn't as much need for workforce, comperatively, than in the past
-the lenient, comfy, and worker-friendly welfare states of western europe, like Spain, must compete with not only the Far East, but east euro EU-member shitholes as well? And skilled labor is accessible at these places, on a rising level.

I think this is globalization, and I think at the end it will be good, but the balance which will set in will mean worse conditions for the workers of the current first world, and better for the rest.

Or we will just start WW3 and nuke the third world to dust.

[The Larch]

-the lenient, comfy, and worker-friendly welfare states of western europe, like Spain

         

We already know that you're biased as hell, but please don't bring even more ridicule upon yourself with this kind of comments.

[Neil]

Well, Spain has got to be pretty comfy when compared to Orbanist Hungary.

[The Larch]

Well, Spain has got to be pretty comfy when compared to Orbanist Hungary.

Even if you're living in Hell it doesn't mean that everything outside of it is Paradise.

[Neil]

Well, Spain has got to be pretty comfy when compared to Orbanist Hungary.

Even if you're living in Hell it doesn't mean that everything outside of it is Paradise.

It is to you.

[Iormlund]

Well, I can't really argue with you based on perceptions and anecdotal evidence, I can only argue based on the official statistics and those suggest that inflation was lower than ever and that purchasing power relative to the rest of the union rose. That's not to say what you write is not correct, but I have no way to refute you or even to comment on it because I don't actually know the situation in Spain.

I've found some figures from the Housing Office. They are about renting, which is relatively rare, and from 2010, when prices had gone down significantly in the renting market. But in essence they estimate renting costs as percentage of young people's income as going from 38% in Larchie's region to 48% in Balear Islands. Madrid and Cataluña, where many young people move to, were at 45%.

Maybe Larchie can add some other data or insight, since IIRC he has lived in Madrid.