A modest proposal for the Eurozone crisis
I think that the general tenor of debate over the crucial next few weeks would be substantially improved if three or four of the smaller Eurozone creditor economies (ones which neither have a significant political voice in the discussions, nor are expected to provide a very large sum to the eventual bailout funds - say Austria, Slovenia, Belgium and the Netherlands) were each to replace their finance ministry delegations to the Heads of Government summit meeting with a small mynah bird trained to say the phrase "Isn't that what people said about Lehman Brothers?"
I have a terrible memory; could someone remind me what the theys were saying about Lehman Brothers, both before and after the firm itself publicly announced that it couldn't make its creditors whole?
ReplyDeleteThey were saying "It wouldn't be too bad if Lehman Brothers was allowed to default - exposures to Lehman Brothers in the banking system are quite limited! In fact it could even help to boost confidence, and it would certainly be good as far as the dreaded Moral Hazard is concerned!".
ReplyDeletebtw, here's a free analytical point for readers of Paul Krugman on this subject: Greece's ability to pay is capped at some amount X smaller than its original debt burden. This fact is invariant with respect to any amount that is lent to it by the rest of the Eurozone. Therefore, if we accept (as everyone basically does) that there will be a restructuring at some point in the future to reduce the debt burden to X, then the *marginal* writedown on *new* debt is 100%, and anything currently being advanced to Greece is basically a fiscal transfer[1]. This is very useful in considering such questions as "How much damage is being done to the Greek economy by the current policy of kicking the can down the road?"
ReplyDelete[1] ie, Greece is analogous to a company trading in insolvency. Which is very illegal for companies to do, but countries aren't like companies.
Daniel's original proposal would be particularly appropriate in the case of Belgium. There is no danger of discrediting the Belgian government by having it represented in the councils of the nations by an Indian starling, because there is no Belgian government to discredit.
ReplyDeleteI note in passing that the Latin name for the Hill Mynah appears to translate literally as "Religious Grackle". I'm rather pleased about that.
chris y
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ReplyDelete"This is very useful in considering such questions as "How much damage is being done to the Greek economy by the current policy of kicking the can down the road?""
ReplyDeleteIs it really as simple as this? As I assumed that part of the price to Greece of kicking the can down the road was a further increase in primary surplus/decrease in primary deficit.
Yes but Greece has to achieve a (cross cycle) primary surplus anyway. Once they've sorted that out, there is a debate to be had about how their revenues should be applied to countercyclical fiscal policy or to debt service, but at present, Greece, structurally, doesn't collect enough taxes to fund its spending commitments.
ReplyDeleteThis is the other analytical point that needs to be made - you have "austerity" of the pernicious sort, like the current UK fiscal policy stance or (arguably) what's going on in Ireland. But there's also "austerity" like we had in Britain in the 1950s (which was *proper* austerity, including food rationing). The postwar austerity policies weren't geared toward any particular cyclical fiscal stance; they reflected the fact that, at the time, the British economy didn't generate enough foreign exchange to pay for its imports (and that we couldn't borrow more).
if we accept (as everyone basically does) that there will be a restructuring at some point in the future to reduce the debt burden to X, then the *marginal* writedown on *new* debt is 100%, and anything currently being advanced to Greece is basically a fiscal transfer
ReplyDeleteHow's that again? Wouldn't the restructuring necessarily have to treat all Greek senior sovereign debt equally, regardless of when it was issued? You're suggesting that the restructuring would basically be a restructuring plus selective default.
From the point of view of the creditors you're right, but I was looking at this from the point of view of Greece; they still end up only paying back X, whether they borrow (X + remainder of their pre-crisis debt) or (X + remainder of pre-crisis debt + whatever else they can borrow).
ReplyDeleteSo you can think of it as a fiscal transfer to Greece, funded by a tax on all Greek bondholders levied pari passu.
Ah, gotcha. Thanks.
ReplyDelete"Once they've sorted that out, there is a debate to be had about how their revenues should be applied to countercyclical fiscal policy or to debt service, but at present, Greece, structurally, doesn't collect enough taxes to fund its spending commitments."
ReplyDelete.. but neither it's spending commitments nor X are totally fixed amounts.
So surely, as long as the can is being kicked, they'll have pressure to reduce the one further and increase the other. Liquidate, liquidate, liquidate! (the famous Parthenon sale of popular Greek nightmare, etc.).
The thing about Greece is that their problems weren't really caused by the crisis, they were simply hidden by the whatever that preceded it. They've always had a revenue problem, because its been politically too whatever to crack down on the wealthy's tax evasion, but it was deemed necessary to have some pretence at being a social democratic state.
ReplyDeleteIncidentally, I notice that Krugman is still moaning about British food on his blog. What with DeLong's inability to find a decent meal in Italy, and Krugman's magnetic attraction to the tourist traps in Leicester square, you'd think somebody would take pity on them.
Incidentally, I notice that Krugman is still moaning about British food on his blog
ReplyDeleteActually he's saying it has improved massively.
He is? Where?
ReplyDeleteCall me insensitive, but I'd rather sell the Parthenon. I mean, what is anyone going to do with it but let it sit there and look good? Most of London belongs to some duke or faceless gang of shitbags or other.
ReplyDeleteNow, the right to operate the port of Piraeus, well, that's worth having..
As a visiting Greek researcher said to me in Edinburgh a few years ago, "Apparently this is the 'Athens of the North'! It's ridiculous!" I was mumbling something self-deprecatingly British when he went on, "Look at all these old buildings! There's nothing like this in Athens - apart from the Acropolis, it all gets torn down and rebuild every ten years. Terrible city!"
ReplyDeleteThe thing about Greece is that their problems weren't really caused by the crisis, they were simply hidden by the whatever that preceded it.
ReplyDeleteTrue, true.
Though I'd like D^2 to draw some lines around the 'everyone' who accepts the inevitability of future restructuring, because I'm not convinced that the Greek protests and the nativist sentiments emerging on their periphery are an elaborate form of performance art.
The risk of working from the basis that all parties are on board with the can-kicking is that it creates political space for other parties to emerge.
I think the Greek population have in general been quite badly misled about the existence of silver-bullet solutions. There isn't the degree of bad faith hanging around that there is in Ireland (where voters who actually did borrow the money are happy to read newspapers which claim that the crisis was nothing to do with them), but there are a lot of people talking about Argentina 2000 as if it wasn't all that bad, which is really not true.
ReplyDeleteChrist, I've just foolishly read the comments at irisheconomy.ie and I'm angry all over again. The commenters there (not so much the main posters who seem pretty level headed, and with exceptions), seem to spend all their time:
ReplyDeletea) discussing various Irish government wizard wheezes for reducing the Irish debt burden at the expense of someone else, usually the German banking system
and
b) complaining that the ECB keeps the Irish economy on a really short rein, with only short-term credit provided and always interferes with Irish economic sovereignty
without any hint of recognition that there might be some connection between a) and b).
I thought the point about Edinburgh being the Athens of the North was that it was full of English visitors in August throwing up everywhere?
ReplyDelete"Now, the right to operate the port of Piraeus, well, that's worth having"
ReplyDeleteSo, in the spirit of your lobby-a-matic, assume there are already plans to privatise Piraeus, and see who is meeting who.
No assumption needed there - OLP Port of Piraeus is definitely on the list of privatisations drawn up as part of the debt reduction plan (actually the Greek govt have been trying to privatise it for the last five years but now it's become somewhat more urgent).
ReplyDeleteHe is? Where?
ReplyDeleteHe links to this http://web.mit.edu/krugman/www/mushy.html
which he wrote way back in the 1990s. The "gourmet mushy peas" headline is not meant to be sarcastic...
Call me insensitive, but I'd rather sell the Parthenon. I mean, what is anyone going to do with it but let it sit there and look good?
ReplyDeleteOh, a few options present themselves.
But in 2008 he was moaning about British food again (along with the reliably frightful Stephen Dubner):
ReplyDeletehttp://krugman.blogs.nytimes.com/2008/12/23/economics-of-english-food/
Good food's not available in restaurants apparently. And there's a plague of bad italian restaurants.
If they manage to privatise Piraeus, the proceeds will be part of X. If they don't, it won't.
ReplyDeleteWhich is why I assumed the headline was meant to be sarcastic. Incidentally the comments on that thread were hilarious. One person confidently asserted that the failure of that overpriced American grocery chain in Kensington was due to the English having no appreciation for good cheese.
ReplyDeleteWhile we're almost on the subject, and for a piece I promised Henry (which I will do after the one I promised Alex and before the one I promised Adam Kotsko), are any readers in a position to confirm my understanding that the Irish "austerity" budget has been based *completely* on benefit cuts and VAT increases (ie, the highest-possible MPC lines the government has) and *not at all* on income tax rises or capital gains or inheritance taxes? I know about the corporation tax thing, but if I'm right about the whole shape of the budget, that's flabbergasting.
ReplyDeleteLondon Bridge is in Arizona, you know.
ReplyDeleteD^2 - I don't think that's 100% right, but I wouldn't swear to it. If you poke around a bit on Cedar Lounge you should be able to find the details (although, with it being an Irish blog and therefore aimed at people who already know the details, you may have to go a couple of removes from posts discussing the reaction to the comment on the reaction to the details that everyone already knows).
ReplyDeleted^2 - pretty much. There's a bit of tinkering round the edges (a 30% AMT for incomes over €400k, and a levy of 2%-6% in 2010), but the headline rates remain the same. (that said, my reference guide on this is now 12 months out of date, so things may have moved on in the mean time).
ReplyDeleteReally quite startled to see how low the Irish personal allowance is, BTW. Only €1,830 in 2010, versus the British equivalent being at least four times this.
Fucking hell. And yet it is the ECB, assisted by the rascally Germans, that is persecuting the widow's mite. What a bunch.
ReplyDeleteI think the Greek population have in general been quite badly misled about the existence of silver-bullet solutions. There isn't the degree of bad faith hanging around that there is in Ireland (where voters who actually did borrow the money are happy to read newspapers which claim that the crisis was nothing to do with them), but there are a lot of people talking about Argentina 2000 as if it wasn't all that bad, which is really not true.
ReplyDeleteIt looks more like mass delusion than deliberate bad faith. Which doesn't really help in any way. The protests are insane, because I don't see how any Greek has legitimate cause to protest against foreigners for what Greece did entirely to itself, allowed for by an excessively low interest rate on Greek debt that was obtained by cooking the books.
how their revenues should be applied to countercyclical fiscal policy or to debt service
How would Keynesian fiscal expansion work in an economy the size of Greece?
They've always had a revenue problem, because its been politically too whatever to crack down on the wealthy's tax evasion
Not precisely true. The Greek wealthy evade all taxes, and the Greek non-wealthy get way overpaid beyond anything that could be reasonably linked to the fundamental state of the Greek economy. Take Greek railways employees, for example. So everybody cheats and everybody steals in some way, except the wealthy probably cheats somewhere more, due to their having more money.
I think it's impossible to bail out Greece unless some kind of permanent hard limit on its ability to borrow is imposed, or else some way engineered to keep its sovereign debt interest rate at least 300 basis points (or 400) above the Bund rate, in the long term. Giving Greece the ability to borrow freely and cheaply is basically baking future bailouts into the pie. I was originally in favour of an unconditional bailout just to tide things over, but the ridiculous street demonstrations have convinced me that it would just lead to serious problems down the road, when the Eurozone no longer has any leverage over Greece.
Myles, I think you may want to check the postwar history of revolutions and dictatorships in Greece.
ReplyDeleteAs I understand it, the book-cooking was a fudged social settlement that both rich and poor could live with. So long as Greeks are blaming foreigners they're not fighting each other.
It's not clear what happens if the Greek government agrees to an austerity package and is promptly stormed by revolutionaries...
Myles, I think you may want to check the postwar history of revolutions and dictatorships in Greece.
ReplyDeleteAs I understand it, the book-cooking was a fudged social settlement that both rich and poor could live with. So long as Greeks are blaming foreigners they're not fighting each other.
Same as Italy, I presume. But the book-cooking settlement doesn't extend to joining the Euro, which Greece has done. NATO might well have been winking and nodding at the Greeks cooking the books, but the Eurocrats were pretty loud and clear on not cooking the cooks in respect to the Euro. They gave Greece more notice than the typical undergraduate gets about plagiarism.
Just because book-cooking was condoned before by someone else doesn't mean it's condoned now by another entity entirely.
Not cooking books, not the cooks. No cannibalism.
ReplyDeleteI'm slow. Why is this a "modest proposal"?
ReplyDelete@Anonymous: J. Swift.
ReplyDeleteWhy is this a "modest proposal"?
ReplyDeleteI proposed it and I wasn't particularly arrogant when I was doing so. Bit of a cliche, I agree.
DD;
ReplyDeleteirish capital taxes were increased to some extent in recent years.
Inheritance tax thresholds dropped successively over three years (parent-child went from 542,544 to 332,084). Rates went from 20% to 25% in 2009. Capital Gains tax also 25% - there seems to be no talk of increasing those rates furthre. Not sure how much gains there are to be taxed. CGT exemption is at 1,270 per individual and all gains since 1974 are chargeable.
Headline income tax rates have not been increased but the tax bands have been dropped so more income is taxable or at the higher rate and in addition the income levy/social charge gives a higher effective rate of tax across the board.
www.revenue.ie has plenty of detail.
Does Ireland have an exemption on CGT for your main home?
ReplyDeleteThanks very much Emir. It still seems very strange to me that the Irish treasury really hasn't explored revenue-raising potential from the higher end of the tax code at all but has instead lumped it all on to a) the highest MPC effects in the tax code and b) in general, the weakest members of society. Clearly there's some lingering Reaganism hanging around.
ReplyDeleteYes, Richard, it does.
ReplyDeleteDD, absolutely right that there is no attempt to take some extra tax from the higher paid which would actually be highly popular. There are various "justifications", inc. threat of capital flight or departure of those precious foreign companies, and lastly that it just wouldn't raise all that much (personally I don't see that as a reason for not doing it). The USC is particularly swingeing on the lower paid who were previously exempt from some of the levies it replaced. I make enough not to have been exempt and when we all got our first post budget pay slips in the office, I was surprised that I wasn't "down" as much as some of the support staff. Crazy, obviously.
Labour have scrapped their plans to introduce a new 48% rate on incomes over 100,000 because of the USC but are talking about re-jigging it to make it less harsh at the lower end. We'll see, there is a real reluctance here to afflict the comfortable.
"capital flight" is the wrong phrase there but basically the idea of "soak the rich, lose the rich".
ReplyDelete[NB: Speaking purely in a personal capacity.]
ReplyDeleteA certain Shakespearean phrase about sound and fury fits the situation best.
The 50% rate was met with a lot of grumbling, but HMRC has clamped down remarkably successfully on material ways of getting round it, AFAICT.
Pete, its generally reasonable to assume that Myles is talking crap. Not engaging is the best course.
ReplyDeleteOh God, the Guardian's on one today:
ReplyDeleteAn abrupt and drastic drop in living standards has been imposed on the Greek people – ultimately to keep afloat banks across Europe that have lent recklessly
Nope. Plenty of banks were bad actors, but much less so in Greece than in Spain and Ireland, and in any case blame is a renewable resource. Greek teachers are not taking 25% pay cuts because of bankers. They're taking 25% pay cuts because the Greek government doesn't collect enough taxes to pay more than 75% of their salaries.
Similarly, "the Irish people" are being made to bear the cost of "reckless bankers", but it does have to be noted that the recklessness of the "reckless bankers" was to lend money to "the Irish people". I am enough of a veteran of conscious-raising debates to know that the response to "blaming the victim" is "denying agency" (it's like rock-paper-scissors) and I think there's a lot of that going on.
Basically, economics isn't a morality play; it's a technical matter in which people keep making really stupid decisions.
Have you ever posted a 'what went wrong and who should pay' piece? What's your opinion of the Irish government's bank guarantee, for example - bad in hindsight but would have seemed to be best option then, painful but necessary, always a bad idea? And if the banks hadn't been guaranteed, but the losses had been borne by investors and bondholders - is this something that has morally better or worse answers, or a decision that was stupid or not-stupid?
ReplyDeleteOn that specific policy, no - I think the counterfactual is incredibly difficult to assess, and you can't reason from the fact that "things are really bad and the bank guarantee is causing lots of problems today" to the assumption that "if it wasn't for this damn bank guarantee we'd be in clover"; Krugman seems to say this sometimes based on the Ireland/Iceland analogy but I'm not convinced.
ReplyDeleteAnd the problem is that we talk about "investors and bondholders", but the losses would have been born by anyone with a bank account; the deposit insurance liability of BoI and AIB would have pushed the Irish State into an unsustainable debt/GDP position on its own, with the added minor inconvenience of a destroyed banking system.
And surprise surprise domestic demand is down.
ReplyDeletehttp://www.irishtimes.com/newspaper/finance/2011/0624/1224299524616.html
Our finance minister has responded by, as one wag said, sounding as if he had a nixer working for Harvey Norman.
"if you’re there with a clapped-out fridge, or a washing machine that doesn’t complete the cycle, now is the time to start thinking about spending"