The Day After... Italy.

[Gustaf]

Ag is an Economics professor. I'm getting my master's degree in economics this summer (hopefully). Phnk is getting some degree in economics, I think, but I forget which.

I'm really not very impressed by the EU "solution". My impression is that they're trying to pass the buck into some vague nothingness.

[Gustaf]

Ag is an Economics professor. I'm getting my master's degree in economics this summer (hopefully). Phnk is getting some degree in economics, I think, but I forget which.

I'm really not very impressed by the EU "solution". My impression is that they're trying to pass the buck into some vague nothingness.

Its like they are trying to make their "solution" as vague and complicated as a structured finance product to confuse the markets just like they accused all of those "greedy bankers" of doing a couple years ago.

Yep, exactly. That's why I'm so wary of it.

[Gustaf]

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Does this mean that CDS spreads will start to become an unreliable indicator of sovereign default risk? I've been looking mostly at yields anyway, but mostly because of what timely data I've been able to find on my own. I imagine this is a useful market because it would send signals more reliably than credit rating agencies.

Are they really doing the credit event thing? I read that there was discussion on it, but if they go through with that they essentially kill that market (at least for government debt) because they're essentially saying that they will never let a state fail in a way that will allow the insurance to work.

It's scary how most eurozone leaders display a total ignorance of how markets work. They really seem to not get it.

[Gustaf]

It's scary how most eurozone leaders display a total ignorance of how markets work. They really seem to not get it.

I think it's quite understandable that they don't. But their senior civil servants (or at least some of them) and some of their advisors, well, maybe they should know better.

Oh, right. I get that they might not have been educated on it originally, but once you reach the position of head of government you should have learnt a bit, imo. And even if you haven't, like you say, their advisors should be able to give them briefs.

I mean, it's one thing when Mugabe prohibited inflation but prohibiting credit ratings, which has been suggested by leading European politicians is at least as stupid (in a sense, probably even more so).

[Gustaf]

As I've been saying before, I think a part of the fiscal union discussion misses the point.

Any solution that means a (in practice) permanent obligation from Germany to pay for the Club Med countries MEANS fiscal union, simply becaue Germany can't accept such a solution without also getting to run the public finances of these countries.

That's why I think solutions like Eurobonds or starting the printing presses won't get around the fiscal union issue.

Torie: the problem was that the euro lent credibility to the bad countries. Had Greece been on their own investors would never have entrusted them with this much debt at such low rates. The markets messed up on this one.

[Gustaf]

Gustaf,

But that depends on what you mean by Germany 'paying' for the Club Med countries. Arguably, simply by being in a currency union with the Club Med countries, Germany is paying for them already, because it is supporting their purchasing power and they are leeching off Germany's purchasing power. Also, the EU has a ton of agricultural subsidies, etc. etc. The free trade zone, movement of labor agreements, even the forced austerity and restructuring are all forms of German subsidy to the weaker countries. So if that's the principle you're after, it's been violated long ago.

It isn't about what principle I'm after, but what the Germans want.

I don't think agricultural subsidies is relevant because that is a specific program that exists independently of the economy in general.

With purchasing power I assume you mean the fact that the euro is overvalued for the Club Med? That hasn't necessarily been a blessing for them, as we've discussed before (I think you've been hammering this point a lot). Anyway, as we see now, it is hard to maintain a high degree of divergence in economic development/performance within a currency area without creating a lot of political tension. The difference in purchasing power seems to me to be just another aspect of the same underlying issue. 

Basically, the payment wasn't obvious to Germany until now (although I agree with you that it's been there from the start, at least implicitly).

[Gustaf]

It isn't about what principle I'm after, but what the Germans want.

Oh I'm not saying anything about what Germans want. I agree that they don't like these subsidies... I mean who would? I'm just saying that it's hypocritical to draw the line at subsidy as a principle because it's already been violated several different, major ways.

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Again, that depends on what you means of 'exists independently of the economy in general'. Agriculture is certainly a part of the economy, and it is indeed a huge subsidy, and quite real. But the other things I mentioned: free trade zone, free labor movement, common currency, and certain common governance rules are also a form of subsidy. Not to mention, the ECB subsidizes the national banks of the Club Med countries by giving them risk-free overnight loans.

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Yes, it's been there from the start in a big way. And it's an important point, because, the only reason why Germany must complete the circle to avoid catastrophe is because it began drawing the circle in the first place.

Germany is like a human that finds a cute baby pet in the forest, takes it home to raise it. After a few months it has grown big and no longer cute, but since it has been coddled for so long it can no longer raise itself. The choice is to keep raising it, or throw it out into the woods to die. Had it been allowed to remain in the wild in the first place, it would be able to survive on its own, but now it cannot...

What I mean is that there is a difference between paying X amount of euros to farmers every year (costly as that is) and paying, in general, for whatever debts other countries may accumulate.

Of course, the Germans aren't happy about agriculture either.

[Gustaf]

I disagree, but I don't want to get into a long discussion now. Let me just restate that I think there is a strong chance such an action would result in a higher-valued Euro than the alternative of continued deepening of the crisis.

You really think so? Printing the eurozone out of the crisis would basically be to say that the strategy to deal with this is precisely that. It means abandoning the ECB inflation target and predicate eurozone inflation on budget discipline in Southern Europe.

Unless, of course, it is coupled with some variety of fiscal union to ensure it doesn't happen again in the future.

IMO, what it comes down to is that you simply cannot decouple authority over the budget with responsibility for paying the budget. Either Greece and other such countries must get the responsibility back by exiting the euro, or they must lose their authority via fiscal union. Otherwise there is no way of making the euro project credible.

[Gustaf]

I disagree, but I don't want to get into a long discussion now. Let me just restate that I think there is a strong chance such an action would result in a higher-valued Euro than the alternative of continued deepening of the crisis.

Long term it is going to destroy the euro. Gustaf here is absolutely on the point. In fact, any European (not just Southern European) government that refuses to borrow to the hilt and then blackmail the ECB into printing more would be irresponsible to its own voters: the negatives of such an action would be spread all over the euro zone, while the positives would all be concentrated in the debt-issuing country. The outcome would be to make euro a weaker currency than drachma would be on its own. It's quite likely that euro members will have to borrow in Swiss franks, pounds or dollars. You really think Germany would want to stay in such a euro zone?

And, yes, the only alternatives are either political and fiscal integration (the latter is not possible without the former), or tough balanced budget amendments to euro countries constitutions. Both are pretty difficult and (especially the latter) not necessarily desirable.

Yeah, balanced budget amendments strike me as quite dodgy. Having automatic stabilizers stepping in during times of crisis is a good thing, imo.

Also, we already have the SGP and that hasn't had any effect at all.

I'd agree that political integration is required for fiscal integration. That's the underlying problem of course - Germans simply don't want to pay for Greeks, because the latter aren't Germans. That is the essential problem of the EU. They're forcing something on the peoples of Europe which lacks fundamental resonance within those peoples.

[Gustaf]

But what evidence is there that European governments would "borrow to the hilt" as you say, and then "blackmail the ECB"? You talk as if European governments were rabid animals without restraint or intellect. I give them more credit than that. Surely they would see that what you describe is a tragedy of the commons scenario and not do what you say.

I mean, is it not fair to say that during the first seven years of the euro, no European governments felt any fear of bond vigilantism? And during this time, they did indeed run up deficits. But not nearly so much as you say here. Further, the Euro during this time did not depreciate to a value 'less than the drachma' would be worth. It actually appreciated from about par to the dollar to well more than the dollar. And certainly this crisis has focused the minds of Europe's democracies on the problem of debt more than they had been before.

I will gladly accept that position.

[Gustaf]

Apparently this passes for an austerity package today:

"The austerity package foresees 59.8bn euros in savings from a mixture of spending cuts and tax rises, with the aim of balancing the budget by 2014. Measures include:

-An increase in VAT, from 20% to 21%
-A freeze on public-sector salaries until 2014
-The retirement age for women in the private sector will gradually rise, from 60 in 2014 until it reaches 65 in 2026, the same age as for men
-Measures to fight tax evasion will be strengthened, including a limit of 2,500 euros on cash transactions
-There will be a special tax on the energy sector

Seriously?

I mean I figure when a politician says "pass this and I'll resign to all of your enjoyment" that you would expect something a little stronger than this. How about maybe:

-20% public sector layoffs?
-20% reduction in public employee pay
-Or adding 50-100 euro co-pays for hospital visits?

I mean at least some real austerity would be something. And we are supposed to expect that the countries are going to cut government spending when things get better? Please!

Tax evasion in Greece is a major part of why they are in the predicament they are in.  If the wealthy paid taxes at the same rate that public sector employees do that would certainly help.  It makes no sense to implement austerity measures on the people who have been dutifully paying taxes all this time while the wealthy who are the biggest evaders are given a free pass.  If you take that into consideration those riots you have been seeing on TV might make a little more sense.

I guess you have problems reading because that austerity package isn't for Greece its for Italy! Beet and Italianboy figured that out, but gee who would have guessed that you wouldn't figure that out?

Does tax evasion mean something different in Italian?  You do realize it is okay if there are similarities between financial reforms in different countries?

You really can't admit making a mistake, can you? You explicitly said that that the tax evasion was the main reason why Greece was in their predicament. You gave no reason for believing that the same is true for Italy.

[Gustaf]

You really can't admit making a mistake, can you? You explicitly said that that the tax evasion was the main reason why Greece was in their predicament. You gave no reason for believing that the same is true for Italy.

Cracking down on tax evasion is but one reform.  I do not know to what degree it plays are role in Italy's current woe's but in a country that gave us the mafia I have to imagine it will do some good.  I do not think that is unreasonable.

By the way Gustaf the thread is titled Italy and my post clearly says Greece.  Where exactly is the confusion?

So...why did you lecture someone talking about Italy with evidence from Greece then? That doesn't make much sense?

[Gustaf]

I'm not going to go through a blow by blow thing with you like Al did, for a variety of reasons.  just a few general points.  first 'efficiency' is a loaded term designed to give basis to all of those liberal economic models that 'prove' unions are the devil, water should be priced out of reach of vast segments of the population, etc.  usually I don't even bother to engage in market logic driven discussion for this reason (and for other reasons) but a few fairly obvious things here can be said, without getting my hands dirty.

the US private pension system is grossly inefficient, however we can reasonably define the term, compared to the public system.  Social Security's administrative costs are about 1% of total money handled.  contrast this with the mass of fiduciaries, investment advisers, lawyers, etc. that have to be paid off in the private system, it's stark.

the elephant in the room is the US health care system.  here 'efficiency' as a loaded term can be stretched so many ways, but one simply look at US health care costs as a share of GDP, which already dwarf that of the other Western liberal democracies, and at the other end look at the outcomes.  millions go without coverage, infant mortality, 37th according to the WHO, etc, etc.  

You demonstrate quite clearly that you have no idea what economic research looks like. Great Scott.

[Gustaf]

This is a confused off-topic discussion, but it's true that there is a problem of externalities involved in scientific research. That is why we have intellectual property rights.

Really, people.

[Gustaf]

This is a confused off-topic discussion, but it's true that there is a problem of externalities involved in scientific research. That is why we have intellectual property rights.

However, intellectual property rights to most technological innovations should by rights be held by the US government.

There is no reason why the government should have IPRs, since it isn't needed, presumably.

[Gustaf]

I'm not an idiot, I'm just not self-circumscribed within the limits of discussion set by elite circles.  granted this will limit my career prospects if I don't give it up; but that's fine, and I have no intention of doing so.  nearly all of your Serious discussion have absolutely no meaning to the majority of the people on the planet, because it isn't intended to care about them.  I don't necessarily care about them either, but I get a high out of it, and I find them on the whole far more interesting.

I trust you don't believe in the above yourself, do you?

[Gustaf]

I'm not an idiot, I'm just not self-circumscribed within the limits of discussion set by elite circles.  granted this will limit my career prospects if I don't give it up; but that's fine, and I have no intention of doing so.  nearly all of your Serious discussion have absolutely no meaning to the majority of the people on the planet, because it isn't intended to care about them.  I don't necessarily care about them either, but I get a high out of it, and I find them on the whole far more interesting.

I trust you don't believe in the above yourself, do you?

what's not to believe?

The whole cliché...I find it hard to believe that a real person would think of themselves that way. Sticking it to the man!

The idea that economic realities do not matter for people is also ridiculous, but I'm well aware that many think so, unfortunately.

[Gustaf]

I didn't say they don't matter to people, I said 1) they're not designed with the general population in mind, and 2) there is no way for the general population to impact economic policy while remaining within the system, so it may as well not.


I'm obviously not 'sticking it to the man' by posting on a message board, but plan to in the future, by defending terrorists, murderers, etc for a living.  maybe something else, who knows.

Well, that is less ridiculous, but potentially contradictory and still rather ridiculous.

See, I get that the second paragraph is decent self-parody but it was hard to tell with that previous post.

[Gustaf]

I think what you're picking up on is that the gap between my enjoying making an argument and believing it is true or correct or whatever is very small or even non-existent.  this shouldn't be taken to mean that I don't 'actually believe' what I say.

This isn't about arguments, it's about, say, perceptions.

[Gustaf]

sure.  and what one perceives is highly dependent on where one is situated.

I don't really buy that type of fatalism, I'm afraid.

[Gustaf]

there has actually been a large-scale academic revival of Marxism since the fall of the USSR.

Haha! Not in economics, there hasn't. Not that Marx didn't contribute back in the day, but referring to him in modern economics is like referencing Freud in modern psychology (well, worse actually).

[Gustaf]

there has actually been a large-scale academic revival of Marxism since the fall of the USSR.

Haha! Not in economics, there hasn't. Not that Marx didn't contribute back in the day, but referring to him in modern economics is like referencing Freud in modern psychology (well, worse actually).

Whether or not a particular school of thought is in fashion, or not, need not effect our own preference for that philosophy, Gustaf.

I deplore most 'modern' thought, and after all that is a sign of good taste, humanity, and a healthy skepticism.  I suggest you cultivate the same qualities, and you may be able to grow up into a worthy man.

You forget that I, being less fashionable than you, do not subscribe to that sort of relativism (at least not when it comes to matters like economics).

[Gustaf]

Marxism in academia never went away (hey, the most respected English language historian pretty much ever - at least within the profession - is a Marxist). Of course... it's questionable (to put it mildly) whether contemporary academic Marxism is something that would have been understood as 'Marxist' (say) fifty years ago, or whether it has much to do with Marxism as usually understood on the internet or (alas) by undergraduates.

I am, of course, not a Marxist in any sense. Just to make that absolutely clear.

Yes, yes, I'm well aware. But I think there is a very big difference between Marxism as a theory to explain politics or sociology or things like that and as an economic theory.

I can't really speak for its viability in those other fields (and given their nature I would guess that it is very hard to define objectively anyway) but I'd be rather confident in saying that Marxism as a theory in economics is almost completely irrelevant. This is not to say that Marx was an idiot or anything, but economics was very nascent back in his day. There was a lot of important stuff they didn't get back then, which means that his framework cannot really be used to analyze the economy today.

[Gustaf]

Yes, yes, I'm well aware. But I think there is a very big difference between Marxism as a theory to explain politics or sociology or things like that and as an economic theory.

I think there's probably an even bigger difference between Marxism as a theory that explains (on its own) anything, and the better forms of academic Marxism. I actually don't think the former has much (any?) use these days, the latter would be different.

Well, you're moving in territory that is largely alien to me. In economics all theories try to explain something.

[Gustaf]

Well, you're moving in territory that is largely alien to me. In economics all theories try to explain something.

Sort of like painting-by-numbers?

Since we aren't marxists the outcomes aren't pre-determined, so no.