Sorry for dominating this board, but it's amazing that this has to be stated

[Beet]

nearly three years into the euro crisis.

What makes a country "Greece"? It's become shorthand for wild government overspending -- especially on entitlements. Paul Ryan says we don't have long to avoid the same fate. Neither does the terrifyingly successful investor Michael Burry. They think that absent drastic reform -- read: cuts -- to the social safety net, we'll end up in penury like the Greeks.

It's a scary story. But it's just a scare story.



Europe's biggest social spenders don't have any problems. And Europe's biggest problem countries don't spend that much on social programs. The death knell of the welfare state this is not.

Here's the dirty little secret of the euro debt crisis. There is no euro debt crisis. There is a euro crisis. The debt is a symptom of the crisis of the common currency.

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Europe's problems are 100% political, and 0% economic. 0%. (can't be emphasized enough) The fiscal and national accounts situation in the Euro Zone is far by the best among the major G-7 currency areas-- the euro, the dollar, the yen and the pound.

[greenforest32]

Isn't part of the issue that the EU is basically imposing balanced budget requirements on the member states? Those mandates will always be brutal through a recession.

So what's going to happen? Some countries breaking off and the rest federalizing further?

[ingemann]

(to Beet) and what's your point? Send more money to Greece?

Yes more or less everyone know this is a crisis based on the Euro's structure and it should be changed. But adopting Eurobonds may save South Europe in the short term, but at the cost of several North European countries risking collapse. Collapsing the Euro could be another solution, I wish you all luck with the Depression which would follow.

Beside that I find the graph irrelevant, yes Germany, Scandinavia and Benelux do better and have higher government spending, at the same time, they have less protection of workers against firing, low corruption and superior infrastructure. So they do better because they have a higher competitiveness against South Europe. As if you look at the reforms the north tries to press down over south, they are more or less attempt to make South Europe more competitive, and sadly some of the easiest way to do that is lower wages and less worker protection. Would it be preferable if South Europe became less corrupt rather than forcing lower wages and less worker protection (against firing); of course but that's something which is a almost impossible to change from the outside, even through EU have started to do something, like cutting off the money transfer to regions which can't prove how they have used the money. But one thing I can tell you the solutions to all this is not to throw money after the Greeks as long as they have as much corruption as they have now. 

[Beet]

This post wasn't aimed at that- it was more about refuting the people who say its all about government spending & therefore it's instructive to countries that have monetary sovereignty. In any case Greece hasn't received a loan tranche in months and much of the money or does receive is used to pay back it's lenders with interest. The troika are imposing quite strict standards. The real 'cost' of letting Greece go is contagion... so if Spain & Italy & Ireland & Portugal have completed adjustments & are immune to contagion then the cost of letting Greece go if it was not reformed at that time... would be much lower.

[opebo]

The point was pretty obvious - high social spending does not lead to indebtedness.

[muon2]

The point was pretty obvious - high social spending does not lead to indebtedness.

The point is obvious in and of itself. As the graph makes clear none of the countries comes close to even half their GDP on social service spending. With so much else in the budget of those countries one shouldn't really expect to see a correlation between any one slice of the budget and bond rates which measure investors' confidence in the entire debt structure of a country.

I found the more telling point of the article the connection between the lack of a sovereign currency and risk of high bond rates.

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The lesson here (missed by the authors IMO) is not about the applicability of Greece to the US, but applying the example of Greece (and the other PIIGS) to the individual sovereign states of the US. The miserable credit ratings for CA and IL are indicative of and in large part due to some of the same factors plaguing the PIIGS. Improving the rate of growth of business and reducing the rate of growth of entitlements (also noted in the article) are the real issues facing both the S. European EC members and the over-indebted states.

[opebo]

The lesson here (missed by the authors IMO) is not about the applicability of Greece to the US, but applying the example of Greece (and the other PIIGS) to the individual sovereign states of the US. The miserable credit ratings for CA and IL are indicative of and in large part due to some of the same factors plaguing the PIIGS. Improving the rate of growth of business and reducing the rate of growth of entitlements (also noted in the article) are the real issues facing both the S. European EC members and the over-indebted states.

No, growth of entitlements should be precisely the political goal of poor people, muon.  Accepting the assumption that 'reducing the rate of growth of entitlements' is a positive goal or even a practical necessity is political suicide for the non-wealthy.

[Politico]

Beet, are you really interested in someday (maybe soon) seeing well over half of YOUR total income go towards taxation in one form or another? I didn't think so.

Some of us simply want to get our nation's fiscal house in order while ensuring obligations towards Social Security and Medicare are met indefinitely so that seniors do not start showing up on the streets en masse. We are not interested in seeing our individual disposable income gutted by an additional quarter to a half at some point down the road in order to fund the largesse of useless bureaucrats of the European flavor.

The main point: Government benefits have costs, you cannot borrow from China indefinitely, you cannot use Greek accounting gimmicks forever, and the vast majority of Americans are unwilling to live with European levels of taxation. Get used to it, buddy.

[Link]

The main point: Government benefits have costs...

Yes and as Beet's graph has shown nicely those costs are not driven up simply because a country engages in an above average amount of social spending.

[Burke]

You cannot draw the conclusion that there isn't a debt crisis by looking at social spending alone. The point is whether spending plans can be credibly funded, either through taxation or the bond markets. The high bond yields for periphery countries reflect the fact that there is doubt as to whether these countries can find this funding and hence close their deficits. Therefore the crisis is only "political" in the sense that current bond yield spreads are not factoring in full cross-subsidisation between member states. Otherwise, it is entirely economic and depicts the relative fiscal strength of each country.

[Beet]

Whether countries can find funding is precisely the measure of the conclusion, hence that's a tautology.

The reason the euro situation is political is because it's precisely the meaning of such terms as a "country" and how fiscal strength is to be mentioned that are in question.

[Burke]

No - the fact that countries struggled to fund themselves in the first place is because of their poor fiscal situation. The crisis is still economic even if a intervention (or lack of) could act to shorten or lengthen it.

If the crisis were political then the political dimension would be sufficient to account for the problems, such that the economic starting point of any member state prior to the crisis would be irrelevant. But this was clearly not the case. Greece was singled out by markets because of its underlying economic situation, deficits owing to deep-rooted structural problems. The country's tax infrastructure is more akin to that in developing country rather than a developed country. Its Treasury did not even forecast its budgets beyond a single year until 2010.

So Greece would have faced tough choices regardless of whether they were in the euro or not when the recession hit. It was not singled out because it was in the euro zone - i.e. the political dimension.

Your argument is that the crisis is ongoing because of the lack of a political resolution, therefore the crisis is political. But if you accept the crisis was initiated by economic factors, then regardless of whether the solution is domestic, pan-European or through the IMF is irrelevant. The crisis is economic. A political solution (or lack of) may cut the crisis short (or prolong it) - but the crisis is still economic.

[Burke]

To restate the paragraph above in a pithier sense : if the crisis is purely political and not economic, then why are Greek bond yields higher than those in Germany?

[Politico]

To restate the paragraph above in a pithier sense : if the crisis is purely political and not economic, then why are Greek bond yields higher than those in Germany?

Answer: The crisis is largely economic, not purely political. With that said, too many politicians in various nations in the monetary union borrowed and spent for too long as if they were Germany when they clearly are not. It is becoming increasingly clear that a monetary union simply cannot be sustained unless it is coupled with a fiscal union. In other words, the EU needs some sort of mechanism to convert away from the Euro and back onto individual currencies (or the monetary union members need to cede fiscal policy to Germany, a far more divisive option for the region when one considers the history of Europe).

[Beet]

To restate the paragraph above in a pithier sense : if the crisis is purely political and not economic, then why are Greek bond yields higher than those in Germany?

It does not matter whether Greek bond yields are higher than German ones or German ones higher than Greek ones. In any currency union where there is no political union, current account imbalances will eventually develop that will lead to crisis. This is not to say that the crisis has not manifested itself through economic mechanisms- of course it has. But the root cause is political. Greece had its corruption, dysfunction and big deficits for decades, and it never caused such a huge crisis. Australia, which owns its own currency, has imported more than it has exported for decades and prospered. Japan has debts multiple times the size of any troubled euro zone member. And so on and so on. What distinguishes this particular situation was the political half-step of attaching itself to a currency union without fiscal union. And what prevents resolution is the political question of whether and to what extent, and how, to move towards a fiscal union.

[Politico]

To restate the paragraph above in a pithier sense : if the crisis is purely political and not economic, then why are Greek bond yields higher than those in Germany?

It does not matter whether Greek bond yields are higher than German ones or German ones higher than Greek ones. In any currency union where there is no political union, current account imbalances will eventually develop that will lead to crisis. This is not to say that the crisis has not manifested itself through economic mechanisms- of course it has. But the root cause is political. Greece had its corruption, dysfunction and big deficits for decades, and it never caused such a huge crisis. Australia, which owns its own currency, has imported more than it has exported for decades and prospered. Japan has debts multiple times the size of any troubled euro zone member. And so on and so on. What distinguishes this particular situation was the political half-step of attaching itself to a currency union without fiscal union. And what prevents resolution is the political question of whether and to what extent, and how, to move towards a fiscal union.

What's next, Beet's endorsement for making Euro the reserve currency of the world after implementation of a fiscal union dominated by Germany? I strongly recommend not biting the hand that feeds you.

[Burke]

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Greece has been a serial defaulter since the 19th century: 1843, 1860, 1893, 1932, 1944, 1964. There is nothing new about their problems. Let's not pretend they had some modicum of economic credibility before the most recent crisis started.

To restate the point I made earlier: Greece's current imbalances would be toxic whether they were in the euro area or not. Their imbalances are toxic because of their economy's structural vulnerability and lack of resilience to economic shocks. This is why markets doubt their ability to close their deficits and why the spread between their yield and Germany's matters: the crisis is economic.

The Japan/Australia comparisons are uncongenial. Japan's debt is manageable because they have a credible plan to slow down the rise in outstanding debt in the near future (reducing deficits) without an austerity spiral. The opposite applies for Greece. And Australia is only able to sustain a current account deficit because of its prospects for growth through an increased population and more effective exploitation of land and natural resources. Again, not possible for Greece.

Now, can political problems compound this crisis? Sure. Prolong the crisis? Absolutely. But they are not the crisis itself. In Greece's case, their economic problems are both necessary and sufficient conditions for a crisis of some kind, with or without currency union. Currency union complicates the problem, but it is not the problem itself.

[Beet]

Greece has been a serial defaulter since the 19th century: 1843, 1860, 1893, 1932, 1944, 1964. There is nothing new about their problems. Let's not pretend they had some modicum of economic credibility before the most recent crisis started.

1944 was hardly a non-political default either as the country was in the middle of World War II and on the verge of its own civil war. 1964 was not a new default, rather it was the end of the debt moratorium of 1932. Excluding those two, Greece had a tremendous record up through 2000. In the space of a century it went from being an agricultural backwater to a developed country nearly on par with the European average. There is no way Greece would be in default today if not for the euro.

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Incorrec, as...

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Lol. Japan's government projects a primary deficit of GDP of 4% in 2020 if its goals are met, which is higher than Greece's primary deficit today. So Japan's deficit in 8 years if its governments goals are met will be worse than Greece in 2011. This is not even to begin to speak of the amount of debt Japan has already built up.

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Excuses. The reality is, Greece has its advantages as well, as Australia. Both countries have current account deficits (Australia has had them since 1959), but only Greece is facing a bond crisis. The same could be said of the US.

[Tetro Kornbluth]

The crisis would still be 100% political even if there were a correlation between spending and debt.

[Burke]

You're completely missing the thrust of the argument. I am not saying that no crisis has political overtones. What I am contending with you is the absurd notion that somehow Greece's situation, and that of other periphery countries too,  is somehow manageable when considered outside of the context of the currency union - i.e. you believe the crisis itself is political not economic.

Greece had a tremendous record before the crisis? Well yes, when you are spending beyond your means and making your deficits look artificially small using swaps from the vampire squid, I suppose it does look pretty good on the surface. The point about an economic crisis is that the veil is removed and credit risk becomes relevant again; sovereign debt is no longer risk-free. Greece's bond yields reflect this risk relative - to say - Germany. This is entirely economic, whether bond yields converge again in the future or not due to a political intervention post de facto.

It is simply risible to assume that Greece would be fine if it entered the crisis without the euro. Even with a massive currency devaluation - which is effectively a default anyway via debt inflation - there would be no way it would be able to support itself. Again, the spread in bond yields reflects domestic credit risk - this point cannot be stressed highly enough. Why? Because it hints at the domestic economic problems.

Now, you added Japan and Australia into the equation to try and demonstrate that current account deficits are sustainable without a debt crisis. You conclude that the difference between, say Japan and Greece, is the absence/presence of a monetary union without a fiscal union. Hence, since this also corresponds with the absence/presence of a debt crisis, you conclude that monetary union without fiscal union (the politics) causes the debt crisis. This is an extremely lazy argument to make because it says nothing of the mechanisms through which such a causation could operate, what you call "excuses". This is why I called on you to differentiate between Germany and Greece bond yields, because if the crisis were purely political, then the relative economic positioning of these countries wouldn't matter.

The fact that it DOES matter when determining domestic credit risk shows that the crisis is inherently economic. You are absolutely right that a political intervention could cut short the crisis, but the crisis is still economic. If the Greeks had sorted out their structural problems long ago, then they would not have been targeted by the markets. If all peripheral countries had sorted out their structural problems, there would be no crisis at all - and the political questions as to potential interventions would not even be relevant. This points to only one conclusion: the crisis is economic.

[Beet]

Well, reality is apparently risible to you. I can't help you there.

The Japan / Australia comparisons should be crystal clear. Other countries have run big deficits, for long terms, often bigger than Greece, without sovereign debt crises. It does not matter that Australia has natural resources, if it is running a trade deficit, then it is still importing more than it is exporting. Greece itself was fine until it joined the Euro.

The theory of causation behind it is simple: countries that issue their own currencies, and whose currencies are not pegged but trade freely on a floating basis don't get into such crises because they can always issue more currency to pay the debt due if need be. Hence even if their interest rates are much higher, there is no problem; inflation may be much higher too. Indeed, this was the case for Greece in the 1980s and 1990s. Growth was comparatively slow, but there was no crisis.

[Burke]

They have run deficits for expanded periods because they have prospects for growth. I have already covered this.

Foreign investors are willing to fund the trade deficit of Australia because they have a fast growing population and a natural resource base that they can exploit in the future for exports. This is why Australia's case is sustainable. Conversely, Greece's population growth is negative and their projected population growth is stagnant. Their overall economic growth prospects are negligible because of deep-rooted structural problems. That's the reality, and that's why they have a sovereign debt crisis. Investors are not willing to lend to Greece because they have no means of paying the money back. Why? Because they believe that Greece will not be able to export enough to raise the necessary funds.

Even if Greece had the ability to print their own currency, they would have an economic crisis by other means: hyperinflation and a fall in investment and employment due to the uncertainty it creates. Having your own currency isn't some magic wand which allows you to shirk your obligations pain-free. Look at Argentina and Brazil ten years ago. So whether the crisis came in a fiscal form through austerity, or a monetary form through hyperinflation, the cause is identical: Greece's ex ante structural problems.

What were these problems? To name just a few:

- Over-reliance on consumption rather than investment.
- Poor tax infrastructure with the highest rates of tax evasion in Europe.
- Low labour productivity compared with the EU average.
- Over-regulation of business activity and excessive bureaucracy.
- Poor scale in the domestic economic sector, impeding inefficiency.

Greece was able to ignore some of these problems temporarily by making use of the glut in credit markets before the crisis. Now, however, it is having to face economic reality. Its fiscal situation is unsustainable because it does not have a credible plan to rectify it without applying pain of some kind. This is due to the problems I have just outlined. This is why the Australia/Greece comparison is nonsensical.

Again, it's not as simple as saying here are two countries that run large trade deficits: one has a debt crisis, one doesn't; one has the ability to issue new currency, one doesn't; therefore this ability causes the presence/absence of an economic crisis. As I said before, if Greece did not enter the crisis with structural problems, then the currency question would not even be relevant. In fact, the inability to issue more currency is not relevant for those countries in the euro area which don't have similar structural problems, i.e. Germany et al. This is, in effect, a natural experiment which shows that it isn't the lack of fiscal union which is the fundamental cause of the crisis, but the structural problems of individual countries.

And that's the key point.

[Beet]

Foreign investors are willing to fund the trade deficit of Australia because they have a fast growing population and a natural resource base that they can exploit in the future for exports. This is why Australia's case is sustainable. Conversely, Greece's population growth is negative and their projected population growth is stagnant.

On the eve of the crisis (2009) Greece had a fertility rate of 1.5 per woman; Australia had a fertility rate of 1.9 per woman. Australia's was higher, but not by a dramatic amount. Australia's fertility rate is below the replacement level. Further, in 2004, Australia's fertility rate was only 1.75 per woman. Further, Greece has advantages Australia does not have. As a member of the euro zone, it receives subsidies from the EU in the form of agricultural supports, trade and labor flexibility, even without separate bailout agreements. And it has strong tourist and shipping industries, which Australia does not have.

However, even if it is true that investors judged that Greece no longer deserved an ability to run a current account deficit (which is quite plausible), it does not follow that it had to have a sovereign debt crisis. Provided that its debt was denominated in its own currency, the value of the debt would have been depreciated along with the country's currency if foreign investors pulled out.

Take the recent case of India- there was a depreciation in the value of the rupee, but not a whiff of a sovereign debt crisis in India.

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Not necessarily. A country's currency can depreciate gently without a severe crisis, provided that it is not pegged. Besides the Indian rupee, another example is the US dollar during the decade 2000-2008. Before the Euro, Greek and Italian currencies routinely depreciated against the Deutsche-Mark, and that is why there was no crisis.

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That only proves my point because Argentina had a pegged currency which they were quite obsessed about; and that was precisely their problem. The Argentine crisis came because its trade partners' currencies were floating and devalued, whereas Argentina's currency could not float.

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Except that not everybody wants to be Germany. Free peoples should be able to choose what structure they want their economy to be, not dictated by you or myself. Without the Euro, Greece would have its freedom and it would be fine; in fact quite successful. The historical record on this is undeniable. With the Euro, Greece has lost its freedom, and is being forced to turn its economy into something it does not want. The decision to remain on the Euro, and the decision or whether or not to rescue Greece, is primarily a political one.

[Politico]

Politicians and bureaucrats in Greece ran their country like Enron. Are you seriously suggesting that the Euro is the sole cause of their troubles? If not for the Germans, I suspect the Greeks would be crippled by hyperinflation right now. If not for subconscious guilt over WW II, Germany would have let the whole kitten-kaboodle collapse two years ago.

[Snowstalker Mk. II]

Politicians and bureaucrats in Greece ran their country like Enron. Are you seriously suggesting that the Euro is the sole cause of their troubles? If not for the Germans, I suspect the Greeks would be crippled by hyperinflation right now. If not for subconscious guilt over WW II, Germany would have let the whole kitten-kaboodle collapse two years ago.