Thursday, August 22, 2013

Success in Greece

Some might still believe, that Germany will be willing to do what it takes to solve the crisis in the eurozone. I do not think that is or will be the case. Merkel said in an interview with SAT.1, yesterday, that her approach - "to only help if the country is willing to reform" - has been proven correct; "and there is no argument about it anymore."

Greece has made very good progress in the last few months when it comes to macro economic things, like debt and the possibility of a primary surplus.
Well, let me still try to argue, that her approach was terrible, based on a scare story that reforms are only possible, while there is reform pressure (falling GDP); and on the fantasy that austerity would be expansionary. Of course "economists" did not have these two ideas at the same time. First they claimed that austerity would be expansionary, now they pretend that falling GDP is good, since it causes reform pressure; and without it the countries would not be willing to destroy their welfare state reform.

What we got was a front-loaded government spending reduction, which has now led to a point at which all of the eurozone will have to accept a significant hair-cut (though Merkel still claims that she does not see it - a head in the sand approach I guess)no matter if Greece stays in the currency or is forced to leave.
Of course, the other choice would have been throwing money at the problem, and put in place baby step reforms, some of which were needed. That is in fact what Germany did with its Agenda 2010 reform. The pensions were not gutted over night, but they are not coupled with inflation, therefore by not increasing them, a slow process, that will last well into the next decade, was enacted. The same goes for unemployment insurance for those who are out of a job for a long term. No inflation adjustment is a slow reform process (it is unconstitutional but that does not matter here). For ten years now every government kept on going through with the plan of the slow and therefore less visible gutting of the welfare state. Front loaded were only some reductions in public health care (teeth) and an improvement of "corporate welfare" by significantly reducing the taxes on earnings.

Sadly, there is nothing that can stop the EU and some governments from trying to implement their vision of total economic freedom and total surveillance of every citizen in the name of the made up super-fundamental right security. Still, even if one accepts that all their reforms in the end lead to the goals of a less stable safety net for the citizens more economic freedom, higher corporate earnings, and a police state (a combination that probably has Hayek spinning so fast in his grave that we could power Berlin); nothing at all points to Merkel's reform first approach being a success, in this gigantic social experiment, on the basis of flimsy science. So let me be the one to argue that her plan was not correct, since it caused the following:
  • Money will still be lost, probably even more than with a throw money at a problem first approach. 
  • The crisis that begun in Greece spread to the whole eurozone. 
  • The "painful reforms" have yielded no economic gains. 
  • The EU institutions have lost all credibility.
  • Democracy is in danger in Greece.
  • Social unrest was caused in the crisis countries.
  • The GDP (this goes for all countries except for Portugal, where the constitutional court stopped large parts of the reform effort and GDP now grows at the fastest rate of all eurozone countries)is falling while debt to GDP is still increasing.
  • Clean-up of the mess caused will take in a best case scenario probably a whole decade in Greece.
  • Unemployment reached levels higher, and lasted longer than during the Great Depression in Spain and Greece.
  • The bank balance sheets have not been fixed. Zombiebanks everywhere

 Where do we stand in Greece?
  • The first rescue package, based on nonsense numbers instead of science: increasing VAT causes little inflation, austerity is expansionary, economic models that were nothing but "reverse engineering": if 110 billion are supposed to solve the problem, then what kind of multipliers do we need. Models, that were nothing but lies from the get go.
  • The second rescue package was also based on models which relied on multipliers, which were complete off the mark: 130 billion.
  • The third rescue package will also be based on lies. rumored around €10 billion-33 billion.
  • Bank stress tests based on lies failed to fix bank balance sheets. The banks will still need to be fixed, because non-performing loans have reached a new high (29 % of all loans in Q1!). The HFSF scheme is based on fantasy numbers and will prove to small, and has already spent most of its funds.
  • Fantasy numbers about revenue from privatisations were, well, fantasy numbers. Only an idiot would think that privatisation can function in a depression(who is supposed to invest into a company which will be gauarnteed to see lower revenue next year). The IMF seems quite surprised that nobody wants to invest in anything but a betting company (pdf - page 10).
  • The young want to leave Greece to look for jobs elsewhere. Worsening an already bad demographic situation.
  • Unemployment will remain high for the whole decade.
  • Greek GDP is under 80 percent of where it stood at in 2007 (see below).
  • Even if GDP grows at an annual rate of 5 percent it will take until at least until 2019 until Greece is back to where it stood in 2007. That is more than a lost decade.
  • Should Greece grow by 2 % on average it will take a total of 20 years to get back to 2007 levels.
  • Greek debt is not sustainable and will not reach a still unsustainable level of 120 percent debt to GDP in 2020.
  • Greece is less competitive now than in 2010, when it was decided to improve it, through cutting wages and gutting the welfare state. Greek industry is exporting a lot of aluminum, and concrete for which energy is needed, which has gotten more expensive. If energy costs are 40 percent (primary Al) or 25 percent (cement) of total costs then lowering wages which are around 7 percent to 10 percent of total cost at the industries is an utterly pointless exercise, if at the same time electricity prices go up as part of a plan to increase competitiveness (how stupid is the troika?). The instability caused by the reforms has reduced tourism revenue. It was therefore utterly futile to reduce the wages. The rise of the Nazis will further decrease interest in traveling to Greece.
 But on the plus side Merkel has one, single, measly, totally irrelevant number, the likely primary surplus (which does not even mean that debt to GDP will stop rising) in Greece this year. She wins.

Merkel now wants to focus on growth, she says. Well, better late than never, but had she done so in 2011 then Greece would not have lost most likely something around 15 years. The eurozone would probably not be in danger of falling apart; and the Cyprus crisis would not have happened at all. The following graph shows what would happen if GDP in Greece would grow by 5 %, 3.5%, 2 % beginning in 2014 based on the eurostat forecast for 2013, compared to a policy which would have initially cost a lot of money in 2011 (0% growth in 2011 and after that 2 % green line), aka. a stimulus policy like in the US and Germany! As one can easily see the policy choices have caused so much damage that it cannot be repaired in this decade even if extremely high growth of 5 % annual is achieved from 2014 onward.
The economic policy, which was based on completely false assumptions; and amounted to nothing more than a gigantic experiment to find out how high the multipliers are (much higher than expected), has caused immense and unnecessary damage; and will in the end be more expensive than helping first and reforming later. Merkel also seems to believe that this focusing on growth will somehow work without touching any significant amount of money, looking at stuff seems to be working well for North-Korea, why not implement this in Europe, too.

Instead of saying that she does not know, how much the next program will cost, she should tell the truth about how much money of the first two rescue packages will be lost, and how much money she thinks her new focus on growth will cost, and how much growth it is supposed to achieve. Instead, she will be reelected for not telling the truth; and that is just sad. That journalists let her get away with it is absolutely unacceptable.

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