Sovereign debt bubble thread

[Sheilbh]

The reason why Greek self-employed is so high at the moment is that doctors and various other professsions are desperately getting themselves burdened with less tax, and self-employment is a good option to do this with. Nothing to do with entrepenurial spirit at all.

That's not true.  That's part of the reason but actually the Greek economy has lots of small businesses and self-employed people in general.  The proportion of independent retailers, for example, is one of the highest in Europe.  The number of small businesses per 1000 people is almost double the EU average.  Over 80% of Greek employment is in SME (compared with 65% EU wide).  What's really striking is the amount of 'microbusiness' though (self-employed - 9 workers).  They form 97% of Greek businesses and employ over 55% of the workforce.  In EU terms it's totally unique.

Although from a cold-hearted perspective even that has played a part in the Greek problems.  The focus on small businesses have probably exacerbated the black economy - so things like unofficial employees and not necessarily paying VAT because you don't need a receipt between friends.

3)  As the article above indicates, the principal way Greece has filled the current account gap from the trade imbalance is through shipping and tourism.  Both are suffering historically brutal recessions.

Worth pointing out that tourism's especially difficult for Greece because the sort of countries they're competing with are Turkey, Bulgaria and Croatia who are significantly cheaper.

Edit:  I think there's something to this argument:
http://www.bloomberg.com/news/2012-02-16/germany-must-decide-what-the-european-union-is-for-clive-crook.html
Also Monti's remarks to the European Parliament yesterday were worth a listen.

[PJL]

The reason why Greek self-employed is so high at the moment is that doctors and various other professsions are desperately getting themselves burdened with less tax, and self-employment is a good option to do this with. Nothing to do with entrepenurial spirit at all.

That's not true.  That's part of the reason but actually the Greek economy has lots of small businesses and self-employed people in general.  The proportion of independent retailers, for example, is one of the highest in Europe.  The number of small businesses per 1000 people is almost double the EU average.  Over 80% of Greek employment is in SME (compared with 65% EU wide).  What's really striking is the amount of 'microbusiness' though (self-employed - 9 workers).  They form 97% of Greek businesses and employ over 55% of the workforce.  In EU terms it's totally unique.

Although from a cold-hearted perspective even that has played a part in the Greek problems.  The focus on small businesses have probably exacerbated the black economy - so things like unofficial employees and not necessarily paying VAT because you don't need a receipt between friends.

Well all that ndicates that the Greece is less developed than the EU, and nothing do to with entrepenural spirit either. More family run firms that have gone on for centuries. By that measure you could argue that India has more SMEs per 1000 people than the EU average, for much the same reason.

[Zanza]

Regarding small-businesses in Greece I found this interesting: http://aristosd.posterous.com/greeks-behaving-badly-the-micro-origins-of-cr

[Sheilbh]

Well all that ndicates that the Greece is less developed than the EU, and nothing do to with entrepenural spirit either. More family run firms that have gone on for centuries. By that measure you could argue that India has more SMEs per 1000 people than the EU average, for much the same reason.

It suggests they're not necessarily anti-business.  But you're probably right.  Although Zanza's link is interesting.  It reminds me of what I've read about Italian businesses with a huge number being very highly skilled, expensive, smallscale producers.  These are signs of development perhaps, but also reflect and stem from culture which will be difficult to change.  As the guy in Zanza's link says 'only a revolution in institutions' would change that.

Edit:  And again in Zanza's link there's a lot about flexibility and diversification of 'family' business income.  Which is rather entrepenurial.

[The Minsky Moment]

Well all that ndicates that the Greece is less developed than the EU

Sure Greece is less developed.  That's always been the case.
But given Greece's geographic and demographic position, it is unlikely that even under the best conditions, it would develop into a major player in industrial manufacturing.  The significance of the shipping and tourism industries, which in part drives the fragmented nature of the economy, arguably reflects true competitive advantages, not accident.

[mongers]

Interesting info MM, so that means you're not offering up Greece and the other PIGS for ritual slaughter ?

Things are a bit more complicated than poor people over extent themselves ?

[Zanza]

http://www.ft.com/intl/cms/s/0/ca04f9fa-58ba-11e1-b118-00144feabdc0.html?ftcamp=published_links/rss/world_europe/feed//product#axzz1mZvFCuPn

February 16, 2012 7:14 pm

Berlin keeps unearthly hush on eurozone crisis

By Quentin Peel in Berlin

Sitting in Berlin in the midst of the eurozone crisis feels like being trapped in the eye of a hurricane. All around Europe the storms of alarm and despondency rage, but in the German capital there is an unearthly hush.

No one seriously doubts that Berlin holds the key to the crisis: as the largest and most prosperous economy in the eurozone, Germany is the one country that can provide the guarantees needed to stabilise the 17-nation European monetary union.

But it is not just economic leadership that the federal republic enjoys inside the European Union. It now has political leadership of the EU thrust upon it. That is a situation in which many Germans feel deeply uncomfortable. They want to be a big Switzerland, prosperous and neutral, not the decisive European power that dictates the rules to the rest.

It seems as if Germany just cannot win. If Berlin spells out what it wants, it is accused of being a jack-booted bully. Even perfectly sensible suggestions get taken the wrong way.

Yet if Angela Merkel, the German chancellor, keeps quiet, or simply repeats the same constant mantra – "if the euro fails, Europe will fail" – she is accused of failing to provide the leadership Europe so urgently needs.

Thus it was, this week, when Wolfgang Schäuble, her wise but sharp-tongued finance minister, spoke out about Greece. In a radio interview, the man widely regarded as the most passionate pro-European in the German government repeated several times his determination to rescue the Greek economy. Then he dared to express his deepest concern: that the political parties in Athens might fail to carry through the drastic reform and austerity programme to which they are nominally committed.

He wanted to reassure German taxpayers they were not pouring their money into a bottomless pit. Comparing Greece with Italy, he suggested that it might be better to postpone elections scheduled for April, and install a government of technocrats – with cross-party backing – to take those unpopular measures.

"Who is Mr Schäuble to insult Greece?" retorted Karolos Papoulias, Greek president. A Greek newspaper warned of the country being taken over by a "Schäuble junta".

There is no doubt Greece is going through hell these days trying to meet the demands of its eurozone partners. Greeks feel humiliated at having to beg for cash. Germany is instantly identified as the culprit. The problem lies on both sides. Mr Schäuble thought he was simply stating the obvious, but in the febrile atmosphere in Athens it was bound to produce an hysterical reaction. As for Mr Papoulias's response, it reveals a fundamental misunderstanding of modern Germany. Greek politicians are not alone in that.

Postwar Germany is both profoundly provincial and committed to Europe. The federal system keeps central government in check, locked into a system of coalition government that is consensual and slow-moving. Both politics and the bureaucracy are dominated by lawyers (Mr Schäuble is one) who believe passionately in the need for rules and respect for the law. It makes for a confusing mixture of compromise and inflexibility. Mixed messages emerge from the different centres of power, not least from the finance ministry and the chancellor's office, until they can agree a common line.

Angela Merkel is the personification of that balancing act: both stubborn and pragmatic. She is a conciliator, not a visionary. In spite of the best efforts of cartoonists, she neither looks nor behaves like a bully. After years of Germany's failing to punch its weight in Brussels, she manages to dominate the European Council through a mixture of conviction, charm and an ability to master her brief better than anyone else at the table.

In learning to be a leader, Germany can still be clumsy and insensitive. The finance ministry's idea of sending a Sparkommissar to run the Greek budget was a case in point. Yet the reality is that the EU will end up controlling Greek spending for the foreseeable future. The Greek finance ministry has proved itself incompetent, but Berlin now knows it cannot be seen to suggest it. That's why there's a hush at the eye of the storm.

[Zanza]

One more article...

http://www.ft.com/cms/s/0/9d38ffee-5639-11e1-8dfa-00144feabdc0.html#axzz1mZx9uJuL

February 13, 2012 7:13 pm

Germany faces a machine from hell

By Gideon Rachman

The press review from around Europe does not make pleasant reading for the German foreign ministry these days. "Look at this stuff, it's just unacceptable," laments one diplomat – pointing to a front-page article from Il Giornale, an Italian newspaper owned by Silvio Berlusconi. The piece links the euro crisis to Auschwitz, warns of German arrogance and says that Germany has turned the single currency into a weapon. The Greek papers are not much better. Any taboos about references to the Nazi occupation of Greece have been dropped long ago.

Across southern Europe, the "ugly German" is back – accused of driving other nations into penury, deposing governments and generally barking orders at all and sundry.

There is also a much more polite form of German-bashing going on at the official level. At the recent World Economic Forum in Davos, Christine Lagarde, the International Monetary Fund's head, Tim Geithner, the US Treasury secretary, and David Cameron, the British prime minister, all made essentially the same point. Germany has to pay up. The argument goes that if the eurozone is to survive – and the world economy is to avoid disaster – Germany has to do much more, and pay much more, to keep the single currency afloat.

These arguments are deeply unfair. They fail to recognise how much Germany has already done for southern Europe. And they make demands for financial commitments that would risk economic and political disaster back in Germany.

Three main policies are being urged on the Germans. First, they should commit more money to a "firewall" – creating a fund so large that it would frighten the markets from speculating against southern European bonds. Second, they should commit to Eurobonds– mutualising the national debts of the eurozone. Third, they should stimulate their own economy, so that German consumption provides a market for southern European goods.

As it happens, Germany has already committed €211bn to the various European rescue funds – which is equivalent to about 70 per cent of its annual national budget. By contrast, many of the countries urging Germany to be more generous are notably backward in coming forward. Britain is not participating in the bail-outs for southern Europe – and is agonising about committing an extra £15bn to the IMF. The US has made it clear that it will provide no more money for the IMF to use in Europe.

More German money is likely to be forthcoming. But the Germans are wary, knowing that loans to southern Europe may never be repaid and that, if things go wrong, Germany could also be on the hook for billions more to bail out the European Central Bank. The argument that by building a bigger firewall of euros, Germany will ultimately save money, is rightly treated with deep scepticism. As one adviser to Angela Merkel puts it: "The southern Europeans don't want this money just to frighten the markets, they want to spend it."

The Germans are also right to resist Eurobonds. Under current EU structures, this amounts to a demand that Germany and other solvent euro users should underwrite the debts of southern European countries, while being given no control over their spending. When a leaked German paper suggested that an EU overseer should be given some control over the Greek budget, the proposal was shot down amid the usual volley of complaints about resurgent Nazism.

The third demand is that Germany must do more to rebalance the European economy. German consumption is, in fact, already rising. But it is difficult to see how Germans can be commanded to buy more goods from southern Europe. Perhaps they could all be given a tax cut in the form of a voucher, redeemable only for a package holiday by the Mediterranean?

Much of the current German-bashing is wild and unfair. But there is one respect in which Germany does bear responsibility for the current crisis. Germany was in the forefront of the countries pushing for the creation of the euro. And yet it is increasingly apparent that creating a single currency, without a single nation behind it, is at the root of the current crisis.

When Chancellor Merkel talks of the need for "political union" in Europe as the long-term solution to the current crisis, she is acknowledging this design flaw. But political union must involve deep losses of national sovereignty. And the current crisis shows that Greeks, Germans and Italians do have one important thing in common – a deep aversion to ceding control of their national budgets.

The result is that the euro is in a dangerous and unstable position. The actions that are being urged on Germany are unreasonable. But Germany's own solution – structural reform now, political union later – is unworkable.

Amid all these dangers, German officials remain outwardly calm. They shrug off the insults, while continuing to pledge financial aid to southern Europe and to make the case for supply-side reforms as the only long-term solution to the woes of the European periphery.

Behind the scenes, however, some of the brightest minds in the German government have a sense of deep foreboding. Twice in the past year I have found myself sitting next to different senior German officials at a dinner who have proceeded to tell me that the whole single currency was a terrible mistake. Speaking of the euro, one of my companions said: "It seems to me that we have invented a machine from hell that we cannot turn off." The image was so bleak and Strangelovian that I laughed. But, I am afraid, it's not really very funny.

[Sheilbh]

The Clive Crook (from the FT) article I posted was written in response to that Rachmann one

While we're on links, I think this article on Italy is interesting if a bit worrying:
http://www.foreignaffairs.com/articles/137200/mark-gilbert/mario-monti-and-italys-generational-crisis?page=show

[Admiral Yi]

Worth pointing out that tourism's especially difficult for Greece because the sort of countries they're competing with are Turkey, Bulgaria and Croatia who are significantly cheaper.

So they should lower their prices.

[The Minsky Moment]

Interesting info MM, so that means you're not offering up Greece and the other PIGS for ritual slaughter ?

Things are a bit more complicated than poor people over extent themselves ?

They all have different problems.

Greece's problem was tax collection problems and its use of international capital markets to finance chronic current account deficits.  But private indebtedness levels in Greece are quite low and thus total national debt levels are pretty tame.

Italy is like Greece in that public debt levels are high and private sector indebtedness is low.  But Italy is more competitive on the current account and has run structural fiscal surpluses for some time.

Spain had the opposite profile from Italy and was more like Ireland - until the crisis public debt and deficit was low, but the private sector and the banking system heavily leveraged in the property market.  The impact of the crisis was to force the publicization of private debt.  Similar to the US but without having the luxury of issuing the worls' leading reserve currency as a national currency.

[mongers]

Interesting info MM, so that means you're not offering up Greece and the other PIGS for ritual slaughter ?

Things are a bit more complicated than poor people over extent themselves ?

They all have different problems.

Greece's problem was tax collection problems and its use of international capital markets to finance chronic current account deficits.  But private indebtedness levels in Greece are quite low and thus total national debt levels are pretty tame.

Italy is like Greece in that public debt levels are high and private sector indebtedness is low.  But Italy is more competitive on the current account and has run structural fiscal surpluses for some time.

Spain had the opposite profile from Italy and was more like Ireland - until the crisis public debt and deficit was low, but the private sector and the banking system heavily leveraged in the property market.  The impact of the crisis was to force the publicization of private debt.  Similar to the US but without having the luxury of issuing the worls' leading reserve currency as a national currency.

I was thinking about this the other day, is there some worst case scenario which ends up with the USA being 'last man standing', because of the dollars reserve status ?

And if so what would happen then ?

[MadImmortalMan]

I was thinking about this the other day, is there some worst case scenario which ends up with the USA being 'last man standing', because of the dollars reserve status ?

And if so what would happen then ?

We take over the world.

[mongers]

I was thinking about this the other day, is there some worst case scenario which ends up with the USA being 'last man standing', because of the dollars reserve status ?

And if so what would happen then ?

We take over the world.

[DontSayBanana]

Europe learns the hard way why Amurrikans moved fiscal and monetary policy onto the federal government.  Film at 11.