Greece, or why Europe's doomed

[NHH]

Greece, or why Europe's doomed

Yeah, but you're all Scando-Knoxian calvinist weirdos who like the cold because you'll be warm enough in hell.

[Anton Gramscescu]

Greece, or why Europe's doomed

Well, yes, there's some truth to that.

That same streak also accounts for our complete lack of a sense of public architecture (an extravagance) and our relative lack of risk-taking, which seems to be serving us reasonably well at the moment. So, you know, take the bad with the good.

[E10 Rifle]

Greece, or why Europe's doomed

Excellent stuff, as usual, from Gary Younge here:

http://www.guardian.co.uk/commentisfree/cifamerica/2010/feb/14/europe-america-democracy-economics-politics

I'm not saying Greece shouldn't reduce its deficit - though I don't know enough about their situation to know exactly how and to what extent - merely that conversations like this should factor in other issues: like democracy (do people actually believe in it?) and class, and what the crisis says about the sort of people who are permitted, nay encouraged, to live on the never-never (the sort of people who actually caused the recession), and the sort of people who are not permitted to do so (electorates who vote for more public spending). And where should the cuts fall? And who should decide them?

Ideology, in tooth and claw, courses through the whole public discussion of this, yet is never identified as such.

[Anton Gramscescu]

Greece, or why Europe's doomed

E10 Rifle wrote:

where should the cuts fall? And who should decide them?

Absolutely this is the issue. Mu point is that excessive borrowing erodes democracy because eventually the choices get made for you by bondholders rather than by voters.

[E10 Rifle]

Greece, or why Europe's doomed

Bit of a Hobson's choice though innit: don't do anything the bondholders won't want you to do, or else the bondholders will force you to do things they want you to do.

[sw2borshch]

Greece, or why Europe's doomed

But if you choose to eat loans instead of taxes, something has to give?

[Anton Gramscescu]

Greece, or why Europe's doomed

E10 - yes, exactly. That's why the trick is not to get that far into debt in the first place.

It's also why 'm a bit dubious about the idea that the UK has to keep borrowing like mad all the way through this recession. If growth picks up in a year or two you might do all right. But if not, you might be looking at the same choice 3-4 years from now.

[E10 Rifle]

Greece, or why Europe's doomed

We're not "borrowing like mad" in this recession though, and no one's really saying we should. Indeed ours is a long way from being the biggest debt in Europe - which is why the argument in Britain about it is so political, rather than just about economics; it could determine how our society goes in the next decade in quite a profound way, which is why the Tories must be stopped.

And I agree that more judiciously applied, fairer (and actually collected) taxation is a better way of going about things than borrowing from wrong'uns.

[Anton Gramscescu]

Greece, or why Europe's doomed

You *are* borrowing like mad - your deficit, as a % of GDP - is almost as high as Greece's. You do have low debt, though, which gives you a couple of years' grace on this (as does a debt-structure which is much longer-term than other countries). But continuing to borrow at that pace - which, as I understand it, is what the Labour Party now wants to make the key plank of their campaign so as to differentiate themselves from the Tories...you don't have unlimited time. 4 more years at the current pace and you're exactly where Greece is.

[Ball Comrade]

Greece, or why Europe's doomed

Isn't one of the things about the Greek crisis that large tranches of spending had been hidden by the previous, right wing government, and that the crisis was now being brought to a head when they're safely out of the spotlight? Seems a bit harsh to blame the electorate for that.

[Ginger Yellow]

Greece, or why Europe's doomed

4 more years at the current pace and you're exactly where Greece is.

Not really. Not all deficits/debt ratios are alike. Japan has a debt to GDP ratio of nearly 200% and it's still rated double-A and nobody thinks they're going to default. Clearly the current deficit spending is unsustainable, but it would be stupid to start slashing spending by double digits while the economy is barely growing, especially given the UK's maturity profile. Also, as mentioned earlier in the thread, the UK has a huge natural investor base which basically has no choice but to buy Gilts, a luxury the Greeks don't have.

[NHH]

Greece, or why Europe's doomed

This question is, I'm sure, likely to elicit guffaws a-plenty, but where does money come from? What, at base, is it? I know it's no longer gold, but appears to be something as ethereal as confidence.

I keep trying to find out, but alas no books seem to be able to speak in layperson's terms.

This money that Greece borrow, from these bondholders. Where does it come from? Who creates it? Does it exist, or is it virtual cash? When they get paid back on these bonds,

I just don't get it. It seems to me that central banks print the stuff, states guarantee the laws saying it'll be honoured and create the framework for its peaceful exchange, and yet appear to be the bitches of this money. But we made it, right? What if Greece abolished money, or created a new currency and said everyone who lent it money before can go swivel. What's the downside? I keep hearing that there would be capital flight, so why not stop it?

And whilst we're at it, what's interest, and does it impel growth economies?

[DCI Harry Batt]

Greece, or why Europe's doomed

If you get to the point where what's being said is "you have to eat less, or the system doesn't work", what do you think happens when people decide they aren't going to eat less?

[Ginger Yellow]

Greece, or why Europe's doomed

This question is, I'm sure, likely to elicit guffaws a-plenty, but where does money come from? What, at base, is it? I know it's no longer gold, but appears to be something as ethereal as confidence.

Pretty much. Even with the gold standard, that's still based on the promise that someone (ie the government/central bank) will redeem a given unit of currency for a given amount of gold. If the guarantor doesn't make good on its promise, the currency loses its value.

This money that Greece borrow, from these bondholders. Where does it come from? Who creates it? Does it exist, or is it virtual cash?

Ultimately, in practice, it comes from reserves held on deposit with the central bank. It's called fractional reserve banking.

What if Greece abolished money, or created a new currency and said everyone who lent it money before can go swivel. What's the downside? I keep hearing that there would be capital flight, so why not stop it?

Well, they could, but there are quite a few likely consequences. They'd have to leave the EU. It would be hard if not impossible for the government (or anyone else) to borrow money from foreign (and even domestic) investors. Greece would face a shortage of hard currency, making trade with other countries difficult. Inflation would almost certainly soar.

[Ginger Yellow]

Greece, or why Europe's doomed

Incidentally, people other than governments have created currencies de novo in the past. My favourite one is Emperor Norton I of America, a nutter who lived in the 1800s and persuaded a lot of San Francisco businesses to accept his currency.



There's also the ongoing Ithaca Hours experiment, whose currency is backed by promises of labour.

[Tubby Isaacs]

Greece, or why Europe's doomed

Gary Younge says in that article we're talking about "processes not outcomes", which is an odd angle to take, and sounds like the sort of thing someone from Demos might say.

I think he's right though about the minutes not being published- that is a disgrace.

[Ginger Yellow]

Greece, or why Europe's doomed

I'm not so sure about that Younge article. For a start, central banks are supposed to be unaccountable - ie independent. The whole reason for the ECB being set up the way it is was so that it wouldn't become an arm of the German government. As for the transparency thing, there is a theory which says central banks should be as opaque as possible (with caveats about governance, of course), to ensure that their interest rate decisions have the maximum impact on the market. I don't agree with it, and I think that the ECB does have governance issues resulting from its lack of transparency, but it's not without supporters. It's one reason why Greenspan was so famously cryptic.

But my central disagreement is that the (main) problem with the ECB isn't its unaccountability. It's the policy stance. The ECB's inflation target is too low, and its instincts too hawkish, to deal with serious, pan-European recessions. This is largely a result of the fact that while the ECB is independent from the German government, it is very much the child of the Bundesbank.

There's another very real problem with the ECB, which is that it has pan-Eurozone control over monetary policy, but there's no equivalent mechanism to govern Eurozone fiscal policy. The existing EU mechanisms have proven woefully inadequate, and when push comes to shove, every nation goes it alone (see, eg, the bank bailouts).

[Tubby Isaacs]

Greece, or why Europe's doomed

Younge would probably say the policy is not unconnected with the bank being unaccountable. I'm not sure that the monetary policy or the principle of independent central banks is that unpopular though.

[Ginger Yellow]

Greece, or why Europe's doomed

I think it would depend how the accountability worked. If it was done on qualified majority votes, like much of the EU, it would probably be even more hawkish. If it was done on a simple majority, then it would probably be more loose on average. The Fed has nominal independence, but it's extremely responsive to the wishes of the government for an independent body, which is always for looser policy until there's a real inflation/currency crisis. If the ECB had had a US style ultra loose policy during the early boom years - and there were calls for that in some quarters, the crisis would almost certainly have been worse.

[Ginger Yellow]

Greece, or why Europe's doomed

In case you're interested, here's what RBC, who do a lot of currency trading, think about the relative risk of various Europeansovereigns.

[Anton Gramscescu]

Greece, or why Europe's doomed

Interesting - is that final number on the right-hand side meant to be a general risk indicator? If so, the UK is already considered worse than either Spain or Italy.

[Ginger Yellow]

Greece, or why Europe's doomed

The z-scores typically denote the degree of divergence from the unweighted average of the group for each factor, with positive z-scores denoting fundamentally weak performance. Hence, the higher the score, the higher the risk.
...
We also calculate an average z-score (unweighted) across all the macro indicators for each country to produce an overall ranking of sovereign risk for all the economies covered.

[Ginger Yellow]

Greece, or why Europe's doomed

If so, the UK is already considered worse than either Spain or Italy.

If you weight all the variables equally, yes. And I imagine it does look pretty bad however you weight them.

[ursus arctos]

Greece, or why Europe's doomed

Though you wouldn't weight them equally if you were seriously trying to measure probability of default, would you?

I'd like to see what the correlation is between the RBC scores and CDS rates (my gut tells me that it isn't very high, but I don't have access to a Bloomberg terminal).

[Ginger Yellow]

Greece, or why Europe's doomed

What countries would you like CDS for?