Friday, July 17, 2015

COTW: The German Elephant

Latest: Germany has forced Greece to lower its flag once again. After an extended debate in the German parliament, the go-ahead to begin negotiations on a third eurozone bailout was given. Until negotiations are completed Greece was given a bridge loan of €7bn euros to cover repayments coming due. Greece will have to swallow a considerable loss of soverignty in return for being allowed to use a hard currency. The IMF, not entirely under EU control, gave Greece a crying towel of sorts: it said in its latest assessment of the Greek economy that the amount of debt Greece has--around €326bn is unsustainable and will require restructuring on scale not previously contemplated. Their are indications that Europe will include debt relief in the new credit package. The bailout agreement must be passed by several governments before August 20th, the due date of Greece's next large debt repayment to the ECB. In the meantime, Greece's VAT will go up Monday from 13% to 23%

Further: {14.07.15}Prime Minister Alexis Tspris came back from Brussels with a crushed, empty cup. Hoping to rest some concessions from his nation's creditors, he only brought back more demands for further "austerity" as a precondition for more loans. The most onerous is privatization of ports, electrical transmission network, and other state assets worth €50bn. His leftist coalition party, Syriza, was elected on a promise among others that it would end the drastic program of state divestment required by creditors. He now faces the problem of getting these demands and more approved by parliament after the Greek people rejected previous creditor demands. While austerity in return for being allowed to stay in the eurozone may be acceptable to the right and center, it is not acceptable to much of the Greek left. Tspris may end up governing from a minority position in parliament.

As explained by an expert in Greek economic matters, the opportunity to modernize Greece's economy was squandered after the miltary junta left power in the 1970's. It is unreasonable to expect Greece to undergo radical economic reformation in the space of a few months that would otherwise take generations to accomplish. For example, despite decades of trying, the country still does not have a modern land title registry.  It is also being asked to overall its civil code of procedure in Greek courts by July 22nd to "significantly accelerate the judicial process." A tightening of labor laws aimed at Greece's powerful unions, obliquely termed "modernization" in the Eurogroup's summit memorandum, is also listed as a goal to accomplished before a new aid program can begin. Tspris may be hoping to simply do enough to get Greek banks open again under ECB control and resume negotiations on an €82bn EU bailout, but that will not be enough to solve Greece's fundamental economic problems and will impose further social hardships on Greeks contrary to his party's promises to them. By caving into the bankers' infexible repayment demands, the Prime Minister who was once seen as Greece's savior, risks turning his nation into a German capitalist colony for decades to come.  Power does not always come from the end of a gun as Germany has demonstated in these negotiations.

Latest:{10.07.15}The latest twist in the extended Greek tragedy is the unexpected policy reversal of Syriza leadership to keep Greece in the euro zone. Some critics are calling it a betrayal of the referendum held last Sunday since the latest proposals offered by the ruling party and endorsed by the Greek parliament early Saturday are substantially similar to those rejected by Greeks in the vote. The real tragedy is that another bail out by Europe will not solve Greece's severe economic problems over the longer term. More bailout loans will keep the nation's banks solvent, but even German leaders now recognize that Greece's debt load is unsustainable. If the EU member nations agree this Sunday to accept Greece's proposals and provide a third tranche of loans, it will be palatable deal for the majority of Greeks if it is eventually followed by debt restructuring. Berlin's leverage, as expected, only increases as the crisis goes on. Greece faces a repayment to the ECB of 3.5bn on July 20th. Most experts think that the EU will accept the latest Greek proposal since France and Italy are behind Prime Minister Alexis Tsipras' concessions. Berlin is still taking a sceptical line since it does not want its taxpayers picking up the bill for what it perceivea as Greek irresponsibility. What the capitulation means for Tsipras' ruling majority also remains to be seen since most of the reforms offered must be implemented between July and October. Several of the reforms are controversial and cross Syriza's electorial "red lines" such as a VAT increase, more pension cuts, more privatization, and an increase in personal and corporate income tax. At the end of a sad day, Greece is no longer in full control of its fiscal and social policies having been forced to accept the dictats of the international banking cartel, notwithstanding the expressed will of its people. Oh democracy, how briefly you bloomed!

Update:{08.07.15}The gauntlet has been thrown down by EU leaders. Greece must acceed to their demands for more reforms or face a forced exit from the single currency zone. Jean-Claude Junker, President of the European Commission said "the last possible moment will be Friday morning" for Greece to respond.  A EU summit meeting is set in Brussels for Sunday. Donald Tusk, European Council President said that Greece's exit from the zone cannot be ruled out.  Europe has a "Grexit scenario prepared in detail', according to Junker.  Greece has only formally asked for three more years of bailout money and promised it would implement a"comprehensive set of reforms" beginning with tax reforms and pension measures as "early as next week". According to Austrian Chancellor Werner Faymann, Greece's Plan B is "another currency". Although adoption of the euro is supposed be irrevocable, other members can vote to cut off all aid to Greece.  Then the European Central Bank (ECB) would then stop supplying euros to Greek banks. The Greek government would be forced to issue "IOUs" to meet its obligations that would most likely take the form of new drachmas [above]. Not being Greek, but perhaps Polynesian, US Person can only submit his proxy: in the long-run Greece will be better off outside the zone.

US Person thinks this chart sums up the predicament of Greece in the euro zone. Thankfully, the zone is dominated not by storm troopers, but by Germany's prowess as a exporter of manufactured goods. Since 1952 Germany has achieved an annual trade surplus shown in this chart:

Germany's trade performance compares favorably with much larger exporting nations, the US and China. Germany exports are worth $1.5 trillion compared to the value of US exports of $1.6 trillion. Yet Germany has only 25% of the population. That is good news for Germany's productivity and German workers--not so good news for net importing countries in the zone that run annual budget and trade deficits like Greece, Ireland, Italy, Portugal and Spain. Because they are locked into a single currency, Germany is able to exploit its productivity advantage and sell relatively low-priced, quality goods to European importer countries. It provides loans to these countries so their demand for German products remains high when German domestic demand has remained flat. Importer countries are encouraged to borrow by the euro's overall strength which allows lower cost borrowing. The single currency zone was supposed to remove the costs of trading in multiple currencies. It has done that, but has also locked-in Germany's competitive trade advantage. Before the single currency, trade imbalances such as the one that exists now between Germany and the its customers were adjusted by the relative value of the importer's currency, i.e. Greek drachma. When the debtor/customers go bust having to pay back mountains of easy credit in euros, like Greece is doing now, who is going to buy German goods in Europe? Perhaps Mr. Schäuble will answer this question?